Petition — Handgards, Inc. v. Ethicon, Inc.
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Supreine Court, U. &
FILED }
SEP 27 1979 |
tes
IN THE
Supreme Court of the Uni
October Term, 1979 fe ia as
K, JR., CLERR
HANDGARDS, INC.,
Petitioner,
vs.
ETHICON, INC.,
Respondent.
Petition for a Writ of Certiorari to the United States
Court of Appeals for the Ninth Circuit.
BLECHER, COLLINS & HOECKER,
MAXWELL M. BLECHER,
CONSUELO S. WOODHEAD,
612 South Flower Street, Suite 800,
Los Angeles, Calif. 90017,
(213) 625-0200,
KENDRICK, NETTER & BENNETT,
JOEL R. BENNETT,
NANCY MILLER BENNETT,
612 South Flower Street, Suite 600,
Los Angeles, Calif. 90017,
(213) 626-7792,
Attorneys for Petitioner
Handgards, Inc.
Parker & Son, Inc., Law Printers, Los Angeles. Phone 724-6622
SUBJECT INDEX
Page
Opmions of the Courts Below .............................. 1
Nee ca sa casannapsigneasnmmancsonine 3
I Nooo occ cs aanscnsncsennnncndasnensonvesrseceses 3
Se SETS ee +
ss nsenenmaenbnncniianniininn 5
A. The Prior Patent Enforcement Conduct ...... 5
B. History of the Present Action ........................ 7
Reasons for Granting the Writ .................0000..0...... 1]
1. The Requirement That Plaintiff Prove De-
fendant’s Bad Faith by “Clear and Convinc-
ing Evidence” Encourages Illegal Monop-
olies Based on Misuse of Patent Power ......
2. The Court of Appeals’ Adoption of a New
“Sole” or “Primary” Standard of Causation
as Opposed to the “Material” or “Substan-
tial” Cause Test—Which Has Served Well
for the Nearly 90 Years of Sherman Act
Enforcement—Flatly Contradicts All Es-
tablished Law and Extends Brunswick Corp.
v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477
(1977), Beyond Its Intended Scope ............
ek seapaoeavenneeanrenees
Appendix 1. Opinion of the United States Court of
Appeals for the Ninth Circuit .................. App. p.
Kennedy, Circuit Judge, Concurring ....................
ed Nasiawhasdatanenciiinavinaerincecpenssars
Kennedy, Circuit Judge, Concurring ....................
11
15
ii
TABLE OF AUTHORITIES CITED
Cases Page
Allen Bradley Co. v. Local Union No. 3, IBEW,
ee PO 0 WIPED icscdecascdeassnsimcisecaesccenanneas 14
Bates v. State Bar of Arizona, 433 U.S. 350 (1977)
Bee Pe Annee i eee ie eee ee
Broadcast Music, Inc. v. Columbia Broadcasting
System, ........ BUM sxerosee , 1979-1 Trade Cas. 4
rE Ue Fae © EE eicscinthinectoccsnercuseeiresoonans 13
Bruce’s Juices v. American Can Co., 330 U.S. 743
EWTN IT... sadiacsiuieitenasa omen eer cae eae en acto 19
Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429
ha AEE CRORE ccclistbeialcdes 15, 16, 17, 18, 19, 20
California v. Federal Power Cémmission, 369
tas Ce I ar i a A ee be 14
California Motor Transport Co. v. Trucking Un-
NO, GF 8B -Fe CIG TE ak sic 14
Cantor v. Detroit Edison Co., 428 U.S. 579 (1976)
aida, calasieinabaavesesnslciaenaps checabercantocee ncdcl wala eiia madi tleidoens, 14
Carnation Co. v. Pacific Westbound Conference,
Rk ae |} EA een Senne macow AlC heirs 14
Cataphote Corp. v. DeSoto Chemical Coatings, Inc.,
450 F.2d 769 (9th Cir. 1971), cert. denied, 408
race We ec ee 11
Connell Construction Co. v. Plumbers and Steam-
fitters Local Union No. 100, 421 U.S. 616
DNA oi esac cecmesneenuicece data te ee 14
Continental Ore Co. v. Union Carbon & Carbide
Coep., $70 U.S. G90 (1962) ................-.-...0..... 18
Eastern Railroad Presidents’ Conference v. Noerr,
365 U.S. 127 (1961)
lil.
Page
Ethicon, Inc. v. Handgards, Inc., 432 F.2d 438
(9th Cir. 1970), cert. denied, 402 U.S. 929,
reh. denied, 403 U.S. 912 (1971) .................... (ae eS
Georgia v. Pennsylvania Railroad Co., 324 USS.
ey RRR Ra PES EW SERN nen eon 14
Goldfarb v. Virginia State Bar, 421 U.S. 773
op RAEN SS ARUN Es AOE S IRIS SN EEN ie OT Oa a 14
Handgards, Inc. v. Johnson & Johnson, 1976-2
‘Trade Cas. ¢ 61,138 (N.D. Cal. 1976) ......0000....
EL CEPT SIN TERN corte ER RE MD AR, VR Ss CeCe a ae
Lawlor v. National Screen Service Corp., 349 US.
I Fave centideri neh bel not ee 19
Local 24 of the International Brotherhood of Team-
sters v. Oliver, 358 U.S. 283 (1959) .................... 14
Meat Cutters Local Union 189 v. Jewel Tea Co.,
ee I hile teeaceenececcetehcceaas 14
Mercoid Corp. v. Mid-Continent Inv. Co., 320 U.S.
FG: | RIEL ire ee ee Ree eee OO mae CEs 14
Mulvey v. Samuel Goldwyn Productions, 433 F.2d
1073 (9th Cir. 1970), cert. denied, 402 USS.
ED i ae haan) 15
New Motor Vehicles Board of California v. Fox,
wa ee ae, | 14
Otter Tail Power Co. v. United States, 410 U.S.
Se 14
Pan American World Airways, Inc. v. United
NR FF Ge I ND och varesn cscccnccssancscasesdece 14
Parker v. Brown, 317 U.S. 341 (1943) 22. 14
Perkins v. Standard Oil Company of California,
mB Re gy. 2 peck een ane ee oe 15
iv.
Page
Perma Life Mufflers, Inc. v. International Parts
Comp., 392 US. 136. ROBB Donon 19
Radovich v. National Football League, 352 U.S.
443 (1997) nnd eee 14
Saf-Guard Products Inc. v. Service Parts, Inc., 532
F.2d 1266 (9th Cir. 1976), cert. denied, 429
U.S. 306 (3976) 0.00. 11
Santa Fe-Pomeroy, Inc. v. P & Z Co., 569 F.2d 1084
Silver v. New York Stock Exchange, 373 USS.
SOL (UGGS) oivcnccicicnciesdaacusnasee eee 14
United Mine Workers v. Pennington, 381 U.S. 657
(1963) .....cncscaciee eee 14
Umied States v. General Electric Co., 80 F. Supp.
989 (S.D.N.Y. 1948)
United States v. Huck Mfg. Co., 227 F. Supp. 791
(E.D. Mich. 1964), aff'd, 382 U.S. 197 (1965)
United States v. Line Material Co., 333 U.S. 287
> ) NnMEMMM Ue ERE Se 14
United States v. Masonite Corp., 316 U.S. 265
(1942)
United States v. Radio Corp. of America, 358 U.S.
334 CURS9) ccc 14
Vendo Co. v. Lektro-Vend Corp., 433 U.S. 623, 97
S.Ct. 2681 C1977) nnn G
Walker Process Equipment, Inc. v. Food Machinery
& Chemical Corp., 382 U.S. 172 (1965) ....2, 8, 11
v.
Page
Zenith Radio Corp. v. Hazeltine Research, Inc.,
BO Re | ee eee 15
Statutes
Clayton Act, Sec. 4 (15 U.S.C. § 15)... ee
Claston Act, Sec. 7 (15 U.S.C. § 18) ...................... 17
I sc Sacciabbn Man aolmaden 12
guetman Act, Sec. 2 (15 US.C. § 2) .............. » ae
United States Code, Title 28, Sec. 1254(1) -.....2..... 3
United States Code, Title 28, Sec. 1291 ...0.000000002... 3
United States Code, Title 35, Sec. 282. .................... 11
United States Constitution, First Amendment .......... 14
United States Constitution, Tenth Amendment ........ 14
Textbook
Devitt & Blackmar, Federal Jury Practice and In-
structions, Secs. 90.3 and 80.18 (1977) oo... 16
IN THE
Supreme Court of the United States
October Term, 1979
et ate
HANDGARDS, INC.,
Petitioner,
VS.
ETHICON, INC.,
Respondent.
Petition for a Writ of Certiorari to the United States
Court of Appeals for the Ninth Circuit.
Petitioner Handgards, Inc. (“Handgards”), prays that
a Writ of Certiorari issue to review the judgment
of the United States Court of Appeals for the Ninth
Circuit, entered in the above-entitled case (Court of
Appeals No. 76-3150).
Opinions of the Courts Below.
This is a civil action for treble damages under the
Sherman Act originally instituted against respondent
Ethicon, Inc. (“Ethicon”), and its parent Johnson &
Johnson charging that defendants had violated Section
2 of the Sherman Act by monopolizing or attempting
to monopolize the market for heat-sealed plastic gloves
sold to manufacturers of home hair care coloring kits.
Handgards’ claim was based primarily on the contention
that Ethicon, acting at the behest of Johnson & John-
son, had. initiated and pursued a series of patent in-
fringement suits against Handgards in bad faith and
as an integral part of an overall scheme to monopolize.
onsiieais
Defendants moved for summary judgment arguing
principally that this Court’s decision in Walker Process
Equipment, Inc. v. Food Machinery & Chemical Corp.,
382 U.S. 172 (1965), restricted treble damage recovery
to patents procured by fraud on the patent office
and that no antitrust claim could be based on the
institution and maintenance of an infringement action
in bad faith (i.e., with knowledge of the patent’s inva-
lidity) even where such bad faith prosecution was part
of an overall scheme to monopolize. The district court
denied summary judgment, 413 F. Supp. 921 (N.D.
Cal. 1975).
After a jury trial, the jury returned a general verdict
in favor of Handgards in the amount of $2,073,000,
prior to trebling, which represented a combination of
out-of-pocket expenses incurred by Handgards in de-
fending the patent cases and profits lost because the
pendency of those cases caused Handgards to lose
business opportunities which would have substantially
increased its market share and profitability. The jury’s
verdict was based upon special interrogatories in which
they found, inter alia: (1) the relevant market consisted
of the market for heat-sealed plastic gloves sold to
manufacturers of home hair care coloring kits; (2)
Ethicon was guilty of monopolizing or attempting to
monopolize the relevant market by prosecuting patent
lawsuits against Handgards and its predecessors in bad
faith, that is, with actual knowledge that either or
both of the patents sued upon were invalid; (3) Ethicon
was guilty of monopolizing or attempting to monopolize
the relevant market by prosecuting a prior patent action
as a predatory act in an overall scheme designed to
exclude Handgards from the market; and (4) Ethicon
and Johnson & Johnson were not guilty of entering
a van
into an agreement, combination, or conspiracy to re-
strain trade or to monopolize the relevant market.
Ethicon’s post-trial motions for new trial and judg-
ment notwithstanding the verdict were denied. Hand-
gards, Inc. v. Johnson & Johnson, 1976-2 Trade Cas.
{ 61,138 (N.D. Cal. 1976).
Pursuant to 28 U.S.C. § 1291, Ethicon appealed
from the judgment entered upon the jury verdict. On
May 3, 1979, the Court of Appeals for the Ninth
Circuit reversed the judgment and remanded the case
for a new trial. On May 17, 1979, Handgards, Inc.,
filed a Petition for Rehearing and Suggestion for In
Banc Hearing. On July 27, 1979, the Court of Appeals
filed an order which (1) contained numerous modifica-
tions of the original opinion, and (2) denied the Peti-
tion for Rehearing. Neither the original opinion, nor
the opinion as modified, has yet been reported. Accord-
ingly, the May 3, 1979 opinion is set forth herein
as Appendix 1 and the Order of July 27, 1979 modify-
ing the May 3, 1979 opinion is set forth herein
as Appendix 2.
Jurisdiction.
The judgment of the Court of Appeals for the Ninth
Circuit was entered on August 14, 1979. The jurisdic-
tion of this Court is invoked under 28 U.S.C. § 1254
(#3.
Questions Presented.
Although two specific legal issues are framed by
the Court of Appeals’ disposition, they are connected
by a common thread: “the need to erect high barriers
to success by the antitrust plaintiff” in order to “prevent
frustration of patent law by the long reach of antitrust
law.” Dealing with the age-old patent/antitrust conflict,
po a
the Ninth Circuit opted to protect “honest patentee(s)”
against charges based on “bad faith” prosecution be-
cause, says the court, “bad faith” “is a subjective
state of mind” which “can spring from suggestive and
weakly corroborative circumstances.” Accordingly, the
broad policy issue presented by this Petition is whether
and to what extent the reconciliation of the patent/
antitrust conflict requires that “high barriers to success
by the antitrust plaintiff’ be erected so that “honest
patentees” be protected from the scourge of treble-
damage plaintiffs.
Specifically, the questions presented for review by
this Court are:
1. Must an antitrust plaintiff whose claim is based
upon the bad-faith prosecution of a patent infringement
case against it be required to prove that “bad faith”
(knowledge of invalidity) by “clear and convincing
evidence” as distinguished from the traditional civil
burden of “preponderance of the evidence”?
2. Must an antitrust plaintiff whose claim is based
upon the bad-faith prosecution of a patent infringement
claim be required to prove that the bad-faith prosecution
was the sole cause of its lost market opportunities
as distinguished from the traditional test long recognized
by this Court, namely, that the antitrust violation be
only a “material cause” of the claimed injury?
Statutes Involved.
1. The Clayton Act, Section 4 (15 U.S.C. § 15),
provides:
“That any person who shall be injured iu his
business or property by reason of anything forbid-
den in the antitrust laws may sue therefor in
= ae
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 recover threefold the
damages by him sustained, and the cost of suit,
including a reasonable attorney’s fee.”
2. The Sherman Act, Section 2 (15 U.S.C. § 2),
provides:
“Every person who shall monopolize, or at-
tempt to monopolize, or combine or conspire with
any other person or persons, to monopolize any
part of the trade or commerce among the several
States, or with foreign nations, shall be deemed
guilty of a misdemeanor, and, on conviction there-
of, shall be punished by fine not exceeding fifty
thousand dollars, or by imprisonment not exceeding
one year, or by both said punishments, in the
discretion of the court.”
Statement.
With some modifications, we can adopt the “Factual
Background” portion of the Court of Appeals’ May
3 Opinion:
A. The Prior Patent Enforcement Conduct.
Petitioner Handgards, Inc., is a Nebraska corporation
engaged in the business of manufacturing, distributing,
and selling disposable plastic gloves adhered to paper.
Handgards was formed from the 1966 merger of two
constituent disposable plastic glove manufacturers:
Plasticsmith, Inc. (“Plasticsmith”), and Mercury Manu-
facturing Company (“Mercury”). Respondent Ethicon
is a wholly-owned subsidiary of Johnson & Johnson
and is engaged in the business of manufacturing, selling
= a
and distributing surgical supplies. Prior to 1969, Ethi-
con manufactured, distributed, and sold disposable plas-
tic gloves adhered to paper through its Arbrook division.
Ethicon ended its participation in the disposable plastic
glove business in 1969, when the assets of its Arbrook
division were transferred to another Johnson & John-
son subsidiary named Arbrook, Inc.
In 1961, Ethicon acquired the assets of the Scott
Company, which, for several years, had marketed dis-
posable plastic gloves produced in accordance with
a process developed by one of its founders, Joe Gerard.
In so doing, Ethicon acquired both Gerard’s pending
application for a patent on his glovemaking process,
as well as his glovemaking equipment. In 1961, Ethicon
also acquired the pending patent application of one
Rene Orsini. On April 3, 1962, the Gerard patent
covering a glovemaking process issued to Ethicon. On
October 20, 1964, the Orsini product patent cover-
ing a heat-sealed glove issued to Ethicon.
Both Plasticsmith and Mercury were engaged in the
manufacture of heat-sealed disposable plastic gloves at
the time the Gerard patent was issued in 1962. After
several months of unproductive negotiations concerning
a licensing agreement for the Gerard patent between
Ethicon and T. Hamil Reidy, the chief executive officer
and controlling shareholder of Plasticsmith and Mer-
cury, Ethicon filed patent infringement suits in October
1962 against both Pasticsmith and Mercury, alleging
infringement of the Gerard patent. In December 1964,
-after the Orsini patent issued, Ethicon supplemented
its patent infringement complaints against Plasticsmith
and Mercury by adding a claim that the Orsini patent
also was being infringed.
—
In 1966, Plasticsmith and Mercury were merged
into a successor corporation, Handgards, Inc., the peti-
tioner. Reidy continued as the chief executive officer
and controlling shareholder in Handgards. In 1967,
after learning that some of the allegedly infringing
machines operated b; Handgards reportedly were owned
by Reidy rather than by Handgards or either of its
predecessor corporations, Ethicon filed an infringement
action against Reidy individually at his Chicago, Illinois
residence. Reidy thereafter voluntarily intervened in
the consolidated action then pending in California.
The consolidated patent infringement suit was tried
to the court in 1968. Ethicon’s trial counsel dropped
the claims concerning the Orsini patent from the action,
reportedly because he thought Orsini to be the weaker
of the two patents and because he believed that narrow-
ing the issues before the court would enhance the
chance of successfully prosecuting the Gerard patent.
On April 25, 1968, the trial judge entered judgment
for Handgards, concluding that the Gerard patent was
invalid because of the existence of a “prior public
use” of the process by Lyle Shabram, one of the found-
ers of Plasticsmith. The Court of Appeals for the Ninth
Circuit affirmed the district court in a brief per curiam
decision. Ethicon, Inc. v. Handgards, Inc., 432 F.2d
438 (9th Cir. 1970), cert. denied, 402 US. 929,
reh. denied, 403 U.S. 912 (1971).
B. History of the Present Action.
Petitioner Handgards filed this civil antitrust action
in 1968 seeking to recover treble damages and other
equitable relief for the injuries it claimed to its business
and property by virtue of the alleged antitrust violations
a oo
committed by defendant-appellant Ethicon and defend-
ant Johnson & Johnson. The gravamen of the plaintiff's
complaint was that the parent-subsidiary defendants
had either unilaterally or in concert, monopolized, at-
tempted to monopolize, and conspired to monopolize
trade and commerce for the purpose of eliminating
plaintiff as a competitor in the sale of disposable plastic
gloves to the hair care markets.
Handgards’ suit began primarily as a Walker Process
case, /.€., a suit alleging antitrust liability for the en-
forcement of a fraudulently obtained patent (Orsini).
See Walker Process Equipment, Inc. v. Food Machin-
ery & Chemical Corp., 382 U.S. 172 (1965). This
theory ultimately proved not viable. In 1975, Handgards
expressly abandoned the Walker Process theory at a
hearing on a motion for summary judgment and instead
asserted the two theories on which this case ultimately
was tried: the first was referred to at trial as the
“overall scheme” theory; the second was referred to
as the “bad faith” theory.
The trial court defined the term “bad faith” as applied
to the prosecution of the Gerard patent infringement
claim as knowing that the particular patent was invalid
because (i) Ethicon allegedly knew (through its agent
Gerard) of relevant prior art existing more than a
year before the filing of the Gerard patent application,
or (ii) Ethicon allegedly knew (through its agent Ge-
rard) that the invention had been on sale more than
a year prior to the filing of the Gerard patent applica-
tion."
1The thrust of Handgards’ case revolved around the Gerard
patent on which Ethicon initially filed its suits. Ethicon also
used the Gerard patent to impair relationships with Handgards’
customers, to abort a joint venture, and to interfere with Hand-
gards’ external finances. The Orsini patent issued later and
=
At the trial, the parties presented dramatically differ-
ent versions of the facts to the jury. Handgards contend-
ed that Ethicon had accumulated the Orsini and Gerard
patents, two key patents in the field, intending to
monopolize the industry; that Ethicon had initiated
and pursued its patent infringement suits against Hand-
gards and its predecessors in bad faith, i.e., with knowl-
edge that the patents were invalid, for the purpose
of monopolizing the market; that even if brought in
good faith, Ethicon’s infringement suits constituted indi-
vidual predatory acts in an overall scheme to monop-
olize; and that Ethicon had generated adverse publicity
regarding its infringement actions, threatening potential
customers of the plaintiff, with the result that vital
corporate resources were committed to defense of the
infringement actions, Handgards’ relations with potential
customers were impaired, a proposed joint venture was
aborted, and the company found itself unable to obtain
outside financing necessary for it to remain competitive
in the industry. Ethicon countered by arguing that
was then added to the pending Gerard infringement suits. Later,
Ethicon abandoned its claims based on the Orsini patent because
they were, in the opinion of Ethicon’s trial counsel, weaker
than Gerard. Thus, the original patent infringement trial did
not adjudicate the validity of Orsini. Literally on the eve of
trial, the trial judge in the antitrust case ruled that Handgards
was obligated to prove Orsini invalid. Faced with that decision,
Handgards elected to attack Orsini only on one of several
possible grounds. The jury found that the Orsini patent was not
invalid on the basis of prior disclosures of another patent.
After the trial, in denying Ethicon’s motions for new trial
and judgment notwithstanding the verdict, the trial judge adopted
Handgards’ pretrial position that the actual invalidity of Orsini
was not an element of, and indeed was irrelevant to, Hand-
gards’ claim. 1976-2 Trade Cas. § 61,138 (N.D. Cal. 1976)
at 70,141-3. This holding is perfectly consistent with the con-
clusion reached by four Justices of this Court that even a
single lawsuit instituted to exclude a competitor from the market
may involve a violation of the antitrust laws. Vendo Co. v.
Lektro-Vend Corp., 423 U.S. 623, 97 S.Ct. 2881, 2902 (1977).
_—
it lacked any improper monopolistic motive in its acqui-
sition of the Gerard and Orsini patents; that it had
initiated the various infringement actions in complete
good faith, after careful investigation, and with the
reasonable expectation of success; that it did not publi-
cize its infringement actions within the industry; and
that Handgards’ competitive problems resulted from
its having marketed a lower quality product, provided
poorer service, and been unwilling to respond to the
competitive demands of the industry.
The jury returned a general verdict in favor of
Handgards in the amount of $2,073,000 prior to tre-
bling and gave the following responses to the special
interrogatories submitted in the case: (1) the Orsini
patent was not invalid on the basis of prior disclosures
of another patent; (2) the relevant market in the
case consisted of the market of heat-sealed plastic
gloves sold to manufacturers of home hair care coloring
kits; (3) Ethicon was guilty of monopolizing or attempt-
ing to monopolize the relevant market by prosecuting
the patent lawsuits against Handgards and its predeces-
sors in bad faith, that is, with actual knowledge that
either the Gerard or the Orsini patent was invalid;
(4) Ethicon was guilty of monopolizing or attempting
to monopolize the relevant market by prosecuting the
prior patent action as a predatory act in an overall
scheme designed to exclude Handgards from the market;
and (5) and (6) Ethicon and Johnson & Johnson
were not guilty of entering into an agreement, combina-
tion, or conspiracy to restrain trade or to monopolize
the relevant market.
— §
REASONS FOR GRANTING THE WRIT.
1. The Requirement That Plaintiff Prove Defendant’s
Bad Faith by “Clear and Convincing Evidence”
Encourages Illegal Monopolies Based on Misuse
of Patent Power.
The Court of Appeals misinterprets this Court’s deci-
sion in Walker Process Equipment, Inc. v. Food Ma-
chinery & Chemical Corp., 382 U.S. 172 (1965),
and its progeny, Cataphote Corp. v. DeSoto Chemical
Coatings, Inc., 450 F.2d 769 (9th Cir. 1971), cert.
denied, 408 U.S. 929 (1972), which require, in a
patent fraud case, that the plaintiff prove the fraud
by clear and convincing evidence. But as the Court
of Appeals observed: “[T]his is not a Walker Process
case.” Handgards did not undertake to prove fraud
on the patent office. Indeed, it expressly abandoned
any contention of such fraud. And, because it did
not undertake to prove fraud as an integral part of
its case (as did Walker Process) the evidentiary stand-
ard normally applicable to claims involving fraud is
not applicable here and should not be.
Nor is Handgards in the position of those having
to overcome a presumption of patent validity by “clear
and convincing evidence.” 35 U.S.C. § 282. See Santa
Fe-Pomeroy, Inc. v. P&Z Co., 569 F.2d 1084, 1091
(9th Cir. 1978); Saf-Guard Products Inc. v. Service
Parts, Inc., 532 F.2d 1266, 1271 (9th Cir. 1976),
cert. denied, 429 U.S. 896 (1976). The Court of
Appeals overlooks the fact that this antitrust plaintiff
already proved invalidity in a separate and earlier pro-
ceeding and proved it not merely by clear and convinc-
ing evidence, but beyond a reasonable doubt—the stand-
ard imposed on it by the trial judge and affirmed
=)
by the Ninth Circuit. Ethicon, Inc. v. Handgards, Inc.,
432 F.2d 438 (9th Cir. 1970), cert. denied, 402
U.S. 929, reh. denied, 403 U.S. 912 (1971). Because
the plaintiff has already met this high burden once,
there is no justification whatever for now requiring,
in a second trial dealing only with the antitrust issue
of specific intent, a second high burden to be overcome
again. In short, neither reason nor justice require “obsta-
cles” to be erected vis-a-vis this antitrust case.
Moreover, there is no logical reason to limit this
new anti-antitrust policy to bad faith patent infringe-
ment suits. It would be consistent and even predictable
to extend the “clear and convincing” standard to (a)
every case in which antitrust policy must be reconciled
with some other public policy and from there to (b)
all attempt to monopolize cases on the ground that
the prospect of vigorous antitrust enforcement chills
aggressive competition. Indeed, the logical extension
of the Court of Appeals decision goes even further.
The Court suggests that a high standard of proof
is needed because bad faith is a subjective state of
mind, and proof of it can therefore “spring from sugges-
tive and weakly corroborative circumstances.” Bad faith
is merely a species of specific intent, the subjective
state of mind which must always be proved in Section
2 attempt cases and in rule-of-reason cases under Section
1 of the Sherman Act as well. Handgards then seems
to be the unprecedented precursor of a rule which
may bind plaintiffs in a/l antitrust cases involving sub-
jective intent to a new and higher standard of proof.
We respectfully submit that the holding which opens
this wide door does not properly accommodate patent
and antitrust law. It encourages use of the infringement
action as an anti-competitive weapon. In its zeal to
—"
prevent “windfall” recoveries, the Ninth Circuit has
given patent holders a green light to undertake infringe-
ment actions on patents of dubious validity and even
on patents which the holders know to be invalid. Conse-
quently, the Court’s holding ignores and contravenes
the sharp warning served last term by Justice Stevens
in his dissent in Broadcast Music, Inc. v. Columbia
Broadcasting System, ........ erat , 1979-1 Trade
Cas. € 62,558 at 77,249 (1979):
“Antitrust policy requires that great aggregations
of economic power be closely scrutinized. That
duty is especially important when the aggregation
is composed of statutory monopoly privileges. Our
cases have repeatedly stressed the need to limit
the privileges conferred by patent and copyright
strictly to the scope of the statutory grant.”
The Court of Appeals decision permits quite the
opposite. The inexorable effect of its artificially high
barriers to the plaintiff’s success is to encourage conduct
invidious to the competitive process and which effec-
tively extends the statutory monopoly. This is not sound
policy. We respectfully urge this Court to consider
the paralyzing, and hence anticompetitive, effect patent
litigation can and does have on prospective competitors.
Here, a jury, after exhaustive trial and argument, found
that Ethicon actually knew the Gerard patent was
invalid when it prosecuted the infringement action
against Handgards. And we emphasize again that here
there was an earlier finding by a judge—not a jury—
that “beyond a reasonable doubt” the Gerard patent
was invalid. The conduct in this case, disclosed by
this record, should be condemned, not condoned, and
this Court should reaffirm its earlier pronouncement
that “. . . this Court should not add requirements
nnn
to burden the private litigant beyond what is specifically
set forth by Congress in those laws.” Radovich v.
National Football League, 352 U.S. 445, 454 (1957).
While we recognize and concede the need to accom-
modate patent and antitrust policy, we note that this
Court and myriad lower court decisions have arrived
at that accommodation in the patent field without
ever resorting to an increased burden of proof.’ More-
over, conflicts between antitrust and other competing
policies, such as the Tenth Amendment (state preemp-
tion),’ the First Amendment (free speech),‘ conflict-
ing federal policy,” and labor laws,° among others,
*E.g., United States v. Line Material Co., 333 U.S. 287
(1948); Mercoid Corp. v. Mid-Continent Inv. Co., 320 USS.
661 (1944); United States v. Masonite Corp., 316 U.S. 265
(1942); United States v. Huck Mfg. Co., 227 F. Supp. 791
(E.D. Mich. 1964), aff'd, 382 U.S. 197 (1965); United States
v. General Electric Co., 80 F. Supp. 989 (S.D.N.Y. 1948).
8Parker v. Brown, 317 U.S. 341 (1943); Cantor v. Detroit
Edison Co., 428 U.S. 579 (1976); Goldfarb v. Virginia State
Bar, 421 U.S. 773 (1975); New Motor Vehicles Board of
Bates v. State Bar of Arizona, 433 U.S. 350 (1977).
‘Eastern Railroad Presidents’ Conference v. Noerr, 365 U.S.
127 (1961); United Mine Workers v. Pennington, 381 US.
657 (1965); California Motor Transport Co. v. Trucking Un-
limited, 404 U.S. 508 (1972); Otter Tail Power Co. v. United
States, 410 U.S. 366 (1973).
®Georgia v. Pennsylvania Railroad Co., 324 US. 439
(1945); Otter Tail Power Co. v. United States, 410 US.
366 (1973); Carnation Co. v. Pacific Westbound Conference,
383 U.S. 213 (1966); Pan American World Airways, Inc.
v. United States, 371 U.S. 296 (1963); Silver v. New York
Stock Exchange, 373 U.S. 341 (1963); United States v. Radio
Corp. of America, 358 U.S. 334 (1959); California v. Federal
Power Commission, 369 U.S. 482 (1962).
°United States v. Hutcheson, 312 U.S. 219 (1941); Allen
Bradley Co. v. Local Union No. 3, IBEW, 325 U.S. 797
(1945); Meat Cutters Local Union 189 v. Jewel Tea Co.,
381 U.S. 676 (1965); Local 24 of the International Brother-
hood of Teamsters v. Oliver, 358 U.S. 283 (1959); Connell
Construction Co. v. Plumbers and Steamfitters Local Union
No. 100, 421 U.S. 616 (1975).
— =
have been accommodated without any court having
found it necessary to establish an evidentiary standard
designed to erect “high barriers to success by the
antitrust plaintiff.”
2. The Court of Appeals’ Adoption of a New “Sole”
or “Primary” Standard of Causation as Opposed
to the “Material” or “Substantial” Cause Test—
Which Has Served Well for the Nearly 90 Years
of Sherman Act Enforcement—Flatly Contradicts
All Established Law and Extends Brunswick Corp.
v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977),
Beyond Its Intended Scope.
In Zenith Radio Corp. v. Hazeltine Research, Inc.,
395 U.S. 100 (1969), this Court, citing several of
its prior antitrust decisions, stated the well-established
applicable law on causation:
“. . . It is enough that the illegality is shown
to be a material cause of the injury; a plaintiff
need not exhaust all possible alternative sources
of injury in fulfilling his burden of proving com-
pensable injury under § 4. Continental Ore Co.
v. Union Carbide & Carbon Corp., supra, 370
U.S. at 702, 82 S.Ct. at 1412 (1962); Perma
Life Mufflers, Inc. v. International Parts Corp.,
392 US. 134, 143-144, 88 S.Ct. 1981, 1986-
1987, 20 L.Ed. 2d 982 (1968) (concurring opin-
ion).” /d. at 114 (emphasis added).
Accord, Perkins v. Standard Oil Company of California,
395 U.S. 642, 648-49 (1969).
Even in the Ninth Circuit, Mulvey v. Samuel
Goldwyn Productions, 433 F.2d 1073, 1075 n.3 (9th
Cir. 1970), cert. denied, 402 U.S. 923 (1971), squarely
holds “substantial” to be the appropriate standard. In-
mn
deed, as Judge Kennedy’s “concurring” opinion in this
case recognizes, the standard jury instruction defines
proximate cause in terms of “substantial factor.” Devitt
& Blackmar, Federal Jury Pracice and Instructions
S$ 90.3 and 80.18 (1977). That instruction, which
was used by the trial judge here, has been for years
the standard instruction in antitrust actions. By stating
in its original opinion that “[t]o be one of several
substantial causes is not enough” and in its modified
July 27, 1979 opinion that “to be one of several
Causes is not enough,” the Ninth Circuit has rewritten
the law in a way that is flatly at odds with this
Court’s and its own prior decisions.
This new standard—which appears to preclude any
other contributing factor—is in no way compelled or
even suggested by this Court’s decision in Brunswick
Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477
(1977). Brunswick had absolutely nothing to do with
whether the antitrust violation need be the “sole” or
the “predominant” or merely a “substantial” cause of
the claimed injury. It dealt with the qualitative relation-
ship between an antitrust violation and a claimed injury.
Brunswick's statement that an injury must “flow from”
the antitrust violation (Brunswick, supra at 489) was
intended to limit recovery to cases where the plaintiff
is one of the class of persons sought to be protected
by the particular antitrust statute on which his damage
claim is based and his injury is of the type that
results from the evils at which the statute is aimed.
Id. In other words, Brunswick dealt not with the quan-
tum of proof needed to establish causation, but with
the connection between the purpose of the particular
antitrust statute in issue and the injury alleged. Hence,
this Court spoke in terms of “antitrust injury,” i.e.,
=|
injury which results from a violation of the purpose
of the statute or, in the Court’s words, which “flows
from that which makes defendants’ acts unlawful.” Jd.
Brunswick is thus fundamentally a “standing” case,
not one which establishes a new substantive standard
relating to the quantum of causal connection evidence.
The majority’s interpretation of the Brunswick phrase
“flows from” results in total distortion of Brunswick's
true holding and extends its scope into an area which it
was not intended to govern. Brunswick should be read
in context with its facts. It was a treble damage case
based on Section 7 of the Clayton Act, 15 U.S.C.
§ 18, which proscribes certain mergers and acquisitions
based, not on a standard of actual restraint of trade,
but on a prospective standard of probable future lessen-
ing of competition or tendency toward monopoly. The
Brunswick case revealed a danger in permitting damage
recovery based purely on the unique anticipatory stand-
ards of Clayton 7. The plaintiff in Brunswick did
not complain about any oppressive post-acquisition con-
duct of Brunswick (a theory which the Court acknowl-
edged might have supported a damage claim), but
instead argued that, having established illegality under
the probable future lessening of competition standard,
it was entitled to a damage recovery because, in the
absence of the acquisition, plaintiff would have been
rid of its major competitor (which Brunswick acquired).
Such an argument stands antitrust on its head and
this Court properly rejected it. But that holding and
those facts are so far removed from the realities of
this case, that comparison is impracticable.
In this case, the evidence showed that the bad faith
conduct of Ethicon (1) caused plaintiff to spend money
for legal fees; (2) reduced sales because of defendant’s
=
threats of suit; (3) caused the man who “controlled”
a good share of the hair care business to back out
of a proposed joint venture with Handgards; (4) im-
paired plaintiff's ability to develop state of the art
equipment and remain competitive; and (5) rendered
hopeless plaintiff's chances for outside financing. All
of those effects were, by the evidence, tied to and
therefore “flowed from” the bad faith patent infringe-
ment suit. To be sure, as is invariably true, the
evidence “does not point in one direction”. Continental
Ore Co. v. Union Carbon & Carbide Corp., 370 U.S.
690, 700 (1962). But the point here is that the
words “flowed from” relied upon so heavily by the
majority are satisfied by the evidence in this record.
This plaintiff was the sole object and sole target of
the bad faith suit. The market sought to be protected
by that suit was the one in which plaintiff (and par-
ticularly the joint venture) threatened defendant. That
market was the object of the attempted monopolization.
The Ninth Circuit’s unwarranted extension of Bruns-
wick to deny recovery to the directly targeted victim
of an antitrust violation is cause for serious concern.
Judge Kennedy’s original “concurring” opinion reflected
such concern when he stated, first, that in his under-
standing the holding did not apply “in all antitrust
cases” and, second, that the “majority does not explain
why a different causation rule is appropriate in this
kind of case.” In his modified “concurring” opinion
of July 27. 1979, Judge Kennedy evidenced continuing
concern with his observation that:
“To the extent this language [‘to be one of several
causes is not enough’] suggests a change in the
normal standards regarding causation in antitrust
cases, the statement is unexplained. There is no
a
need in this case to reexamine the rule that ‘proxi-
mate cause’ in antitrust cases is defined in terms
of ‘a substantial cause.’ . . . To the extent the
language applies only to antitrust claims based
on prior patent infringement actions, the majority
similarly does not explain why a different causation
rule is appropriate in this kind of case. Brunswick
Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477
(1977) is squarely in point for our holding that
the injury must result from a competitive wrong
prohibited by the antitrust laws, but in my view
it should not be interpreted to introduce a new
standard for proving causation either in antitrust
cases generally or antitrust claims based on prior
patent litigation.”
The Ninth Circuit’s misinterpretation and unjusti-
fied extension of Brunwick is dangerous. Rarely,
ever, could an antitrust plaintiff establish that the anti-
trust violation was the sole cause of the plaintiff's
alleged injury. Yet, this is what the Ninth Circuit
appears to require. Such a rule would seriously erode
the effectiveness of private antitrust cases as a signifi-
cant component in the vigilant enforcement of national
antitrust policy. Perma Life Mufflers, Inc. v. Interna-
tional Parts Corp., 392 U.S. 134 (1968); Lawlor v.
National Screen Service Corp., 349 U.S. 322 (1955);
Bruce’s Juices v. American Can Co., 330 U.S. 743
(1947). In Perma Life, this Court condemned judicially
created restrictions which “. . . threaten the effectiveness
of the private action as a vital means for enforcing
the antitrust policy of the United States.” 392 USS.
at 136.
The new standard on causation in antitrust cases
poses just such a threat. Brunswick does not compel
|
—20— |
or even intimate such a result. We respectfully submit
that this Court should now act to ensure that Brunswick
is not read by the lower courts as a license to restrict
recovery in antitrust cases where the injury arises from
the competitive wrong prohibited by the antitrust laws.
Conclusion.
For the reasons stated above, this Honorable Court
should grant the Petition for Writ of Certiorari sought
herein.
DATED: September 26,1979
Respectfully submitted,
BLECHER, COLLINS & HOECKER,
MAXWELL M. BLECHER,
CONSUELO S. WOODHEAD,
KENDRICK, NETTER & BENNETT,
JOEL R. BENNETT,
NANCY MILLER BENNETT,
By MAXWELL M. BLECHER,
Attorneys for Petitioner
Handgards, Inc.
APPENDIX 1.
Opinion.
United States Court of Appeals, for the Ninth Cir-
cuit.
Handgards, Inc., a Corporation, Plaintiff-Appellee
vs. Ethicon, Inc., a Corporation, Defendant-Appellant.
No. 76-3150.
Filed: May 3, 1979.
On Appeal From the United States District Court
for the Northern District of California.
Before: SNEED and KENNEDY, Circuit Judges, and
VON DER HEYDT,* District Judge.
SNEED, Circuit Judge:
Ethicon appeals from a judgment rendered after a
civil jury trial in which it was found guilty of violat-
ing Section 2 of the Sherman Act by monopolizing
or attempting to monopolize the market for heat-sealed
plastic gloves sold to manufacturers of home hair care
coloring kits. Plaintiff-appellee Handgards bases its pri-
vate antitrust action upon its contention that Ethicon
earlier had initiated and pursued a series of patent
infringement suits against it in bad faith, or as an
integral part of an overall scheme to monopolize. On
appeal, Ethicon argues, inter alia, that the district
court erred in instructing the jury that Ethicon could
be found guilty of an antitrust violation upon proof
by a mere preponderance of the evidence that it had
prosecuted one or more ill-founded patent infringement
actions in bad faith and with an intent to monopolize.
*Hon. James A. Von der Heydt, Chief United States District
Judge for the District of Alaska, sitting by designation.
sinellione
This court has jurisdiction pursuant to 28 U.S.C. §
1291. Because we conclude that the district court erred
in so instructing the jury and because of certain deficien-
cies with respect to the court’s charge regarding dam-
ages, we reverse the judgment entered below and re-
mand the case for a new trial.
I.
Factual Background
It is helpful to set forth a brief description of the
patent enforcement conduct which forms the basis for
Handgards’ antitrust complaint before reviewing the
history of the instant action.
A. The Prior Patent Enforcement Conduct.
The plaintiff-appellee Handgards, Inc. is a Nebraska
corporation engaged in the business of manufacturing,
distributing, and selling disposable plastic gloves ad-
hered to paper. Handgards was formed from the 1966
merger of two constituent disposable plastic glove manu-
facturers: Plasticsmith, Inc. (Plasticsmith) and Mercury
Manufacturing Company (Mercury). The defendant-
appellant Ethicon, Inc. is a wholly-owned subsidiary
of Johnson & Johnson and is engaged in the business
of manufacturing, selling, and distributing surgical sup-
plies. Prior to 1969, Ethicon manufactured, distributed,
and sold disposable plastic gloves adhered to paper
through its Arbrook division. Ethicon ended its partici-
pation in the disposable plastic glove business in 1969,
when the assets of its Arbrook division were trans-
ferred to another Johnson & Johnson subsidiary named
Arbrook, Inc.
In 1961 Ethicon acquired the assets of the Scott
Company, which, for several years, had marketed dis-
— a
posable plastic gloves produced in accordance with
a process developed by one of its founders, Joe Gerard.
In so doing, Ethicon acquired both Gerard’s pending
application for a patent on his glovemaking process,
as well as his glovemaking equipment.’ In 1961 Ethi-
con also acquired the pending patent application of
one Rene Orsini.” On April 3, 1962, the Gerard patent
covering a glovemaking process issued to Ethicon. On
October 20, 1964, the Orsini product patent covering
a heat-sealed glove issued to Ethicon.
Both Plasticsmith and Mercury were engaged in the
manufacture of heat-sealed disposable plastic gloves
at the time the Gerard patent issued in 1962. After
several months of unproductive negotiations concerning
a licensing agreement for the Gerard patent between
Ethicon and T. Hamil Reidy, the chief executive officer
and controlling shareholder of Plasticsmith and Mer-
cury, Ethicon filed patent infringement suits in October
1962 against both Plasticsmith and Mercury, alleging
infringement of the Gerard patent.* In December 1964,
after the Orsini patent issued, Ethicon supplemented
its patent infringement complaints against Plasticsmith
and Mercury by adding a claim that the Orsini patent
also was being infringed.
‘Gerard filed the patent application covering his glovemaking
process on January 2, 1958.
Orsini filed an application for a French patent on September
17, 1956; he filed for a United States patent on September
15, 1957.
’Ethicon filed suit against Plasticsmith, a Delaware corpora-
tion, on October 30, 1962, in Delaware. Ethicon filed suit
against Mercury, a Nebraska corporation, on October 31, 1962,
in Nebraska. After attorneys for Plasticsmith prevailed on a
motion to transfer the Delaware action to the Northern District
of California, Ethicon’s attorneys consented to the transfer
and consolidation of the Mercury action with the Plasticsmith
action.
—
In 1966 Plasticsmith and Mercury were merged into
a successor corporation, Handgards, Inc., the plaintiff
in this case. Reidy continued as the chief executive
officer and controlling shareholder in Handgards. In
1967, after learning that some of the allegedly infringing
machines operated by Handgards reportedly were owned
by Reidy rather than by Handgards or either of its
predecessor corporations, Ethicon filed an infringement
action against Reidy individually at his Chicago, Illinois
residence. Reidy thereafter voluntarily intervened in
the consolidated action then pending in California.
The consolidated patent infringement suit was tried
to the court in 1968. Ethicon’s trial counsel dropped
the claims concerning the Orsini patent from the action,
reportedly because he thought Orsini to be the weaker
of the two patents and because he believed that narrow-
ing the issues before the court would enhance the
chance of successfully prosecuting the Gerard patent.
On April 25, 1968, the trial judge entered judgment
for Handgards, concluding that the Gerard patent was
invalid because of the existence of a “prior public
use” of the process by Lyle Shabram, one of the
founders of Plasticsmith.* On appeal, this court af-
firmed the district court in a brief per curiam decision.®
‘The “prior public use” defense arises under 35 U.S.C.
§ 102(b), which provides that:
A person shall be entitled to a patent unless—
(b) the invention was patented or described in a printed
publication in this or a foreign country or in public
use or on sale in this country, more than one year
prior to the date of the application for patent in the
United States.
SEthicon, Inc. v. Handgards, Inc., 432 F.2d 438 (9th
Cir. 1970), cert. denied, 402 U.S. 929, rehearing denied,
403 U.S. 912 (1971). The complete text of the court’s decision
reads as follows:
~~
B. History of the Present Action.
Plaintiff-appellee Handgards filed this civil antitrust
action in 1968 seeking to recover treble damages and
other equitable relief for the injuries it claimed to
its business and property by virtue of the alleged anti-
trust violations committed by defendant-appellant Ethi-
con and defendant Johnson & Johnson. The gist of
the plaintiff's complaint was that the parent-subsidiary
defendants had either unilaterally or in concert, monop-
olized, attempted to monopolize, and conspired to mo-
nopolize trade and commerce for the purpose of elimi-
nating plaintiff as a competitor in the sale of disposable
plastic gloves to the hair care and medical markets.
Plaintiff altered its primary theory of recovery dra-
matically during the eight year period between the
time it commenced this action and the time of trial
in 1976. Handgards’ suit began primarily as a Walker
Process case, i.€., a suit alleging antitrust liability for
the enforcement of a fraudulently obtained patent (Orsi-
ni).° See Walker Process Equipment, Inc. v. Food
Ethicon’s Gerard patent No. 3,028,576 was held invalid
because the trial court found that under 35 U.S.C. § 102(b)
there was prior public use for more than one year of
the concept of the machine, the subject of the patent.
There is little or no direct contradiction in the oral evi-
dence. In our view, we have a case that could have been
decided either way. Ethicon contends the testimony of
Handgards’ principal was too weak and impaired by certain
circumstances. But the trial court was entitled to give
more weight to other circumstances which point to Hand-
gards’ version being correct.
The decree is affirmed because the findings are not
clearly erroneous.
®‘Walker Process stands for the proposition that “the enforce-
ment of a patent procured by fraud on the Patent Office
may be violative of § 2 of the Sherman Act provided the
other elements necessary to a § 2 case are present.” 382
U.S. at 174. Mr. Justice Harlan, concurring, stressed that
(This footnote is continued on next page)
— a
Machinery & Chemical Corp., 382 U.S. 172 (1965).
This theory ultimately proved not viable." In 1975
Handgards expressly abandoned the Walker Process
theory at a hearing on a motion for summary judgment
and instead asserted the two theories on which this
“deliberate fraud” was required and that the Court did not
hold
that private antitrust suits might also reach monopolies
practiced under patents that for one reason or another
may turn out to be voidable under one or more numerous
technicalities attending the issuance of a patent [for such
a result] might well chill the disclosure of inventions
through the obtaining of a patent because of fear of
the vexations or punitive consequences of treble damage
suits.
382 U.S. at 180 (Harlan, J., concurring).
Handgards’ original complaint charged the defendants with
(i) a violation of section 7 of the Clayton Act, allegedly
occurring when Ethicon acquired the assets of the Scott Com-
pany in 1961 and (ii) violations of the Sherman Act, allegedly
occurring as the result of a fraudulent procurement of the
Orsini patent. A supplemental complaint was filed in 1974
which also charged that the defendants had continued to violate
the antitrust laws since the date of the original complaint
by committing certain illegal acts such as the instigation of
baseless lawsuits and pricecutting. Neither complaint charged
Ethicon with fraudulent procurement of the Gerard patent.
Although plaintiff sought to add such a contention in 1974,
the district court had denied leave to amend the complaint.
The only allegations in either complaint pertaining to the
invalidity of the Gerard patent were that the Gerard patent
had been found invalid on the bsais of a prior public use
and that “[d]uring the pendency of such action, defendants
obtained additional information showing and confirming the
invalidity of the Gerard patent.”
"In 1971 Ethicon filed a motion for summary judgment,
arguing that the undisputed facts precluded a finding that
the Orsini product patent had been fraudulently procured under
the criteria set out in Walker Process, supra. See note 6
supra. The district court denied defendant’s motion in 1972
pending completion of discovery in the case, but noted that
“{a] ruling that no triable issue of fraud in the procurement
of the Orsini divisional patent exists would be within .. .
[its] sound discretion.” Ethicon renewed its motion for summary
judgment in 1975, at which time the district court granted
the motion in part and denied it in part. Handgards, Inc.
v. Johnson & Johnson, 413 F. Supp. 921 (N.D. Cal. 1975).
jkali cas
case ultimately was tried: the first was referred to
at trial as the “overall scheme” theory; the second
was referred to as the “bad faith” theory. The district
court’s published opinion on the motion for summary
judgment reflected the new orientation of plaintiff's
case. Handgards, Inc. v. Johnson & Johnson, 413 F.
Supp. 921 (N.D. Cal. 1975).
[1] Handgards now largely bases its monopoli-
zation charge on the various patent infringement
and other lawsuits brought on behalf of Ethicon
by J & J house patent counsel. The claim is
rooted in Kobe, Inc. v. Dempsey Pump Co.,
198 F.2d 416 (10th Cir. 1952), cert. denied,
344 US. 837, 73 S.Ct. 46, 97 L.Ed. 651 (1952),
and its progeny—particularly Mach-Tronics, Incor-
porated v. Zirpoli, 316 F.2d 820 (9th Cir. 1963),
Rex Chainbelt, Inc. v. Harco Products, Inc., 512
F.2d 993 (9th Cir. 1975), and Prelin Industries,
Inc. v. G & G Crafts, Inc., 357 F. Supp. 52
(W.D. Okl. 1972). The Ethicon suits were pur-
portedly brought as integral ingredients of a
scheme to monopolize the disposable glove mar-
Ket....
[2] Plaintiff charges that defendants attempted
to create a monopoly in the disposable glove indus-
The district court’s opinion on the motion for summary judgment
noted the death of any Walker Process allegations, stating
that “Handgards represented at oral argument on the motion
and in its post-hearing reply memorandum that it was not
proceeding as though this case were governed by Walker Process
Equipment, Inc. v. Food Machinery & Chemical Corp.,” that
the “abandonment by plaintiff of its primary theory of recovery
based on the Orsini patent is no surprise,” that the “Orsini
patent infringement suit was not prosecuted in violation of
Walker Process,” and that plaintiff's complaint had never con-
tained a Walker Process allegation regarding the Gerard patent.
413 F. Supp. at 923.
=
try by accumulating a number of the relevant
patents—no matter how weak or narrow—and
then instigating a series of lawsuits in order to
slowly litigate the competition out of business.
The bringing of a series of ill-founded patent
infringement actions, in bad faith, can constitute
an antitrust violation in and of itself if such suits
are initiated or pursued with an intent to monopo-
lize a particular industry (and, of course, the
other elements of a Section 2 violation are pres-
ent). Otter Tail Power Co. v. United States, 410
U.S. 366, 93 S.Ct. 1022, 35 L.Ed. 2d 359 (1973);
California Motor Transport Co. v. Trucking Un-
limited, 404 U.S. 508, 92 S.Ct. 609, 30 L.Ed.2d
642 (1972); Kellogg Co. v. National Biscuit Co.,
71 F.2d 662, 666 (2d Cir. 1934); Bolt Associates,
Inc. v. Rix Industries, supra, {1973-1 Trade Cases,
q 74,474 (N.D. Cal. 1973) ].
413 F. Supp. at 923-25 (emphasis in original).
The court defined the term “bad faith” in this context
as knowing that the particular patent was invalid be-
cause (i) Ethicon allegedly knew (through its agent
Gerard) of relevant prior art existing more than a
year before the filing of the Gerard patent application;
(ii) Ethicon allegedly knew (through its agent Gerard)
that the invention had been on sale more than a year
prior to the filing of the Gerard patent application;
or (ili) Ethicon allegedly knew that the Orsini patent
was invalid because material information had been with-
held from the patent examiner.® Jd. at 925.
“In its 1972 decision on defendant’s motion for summary
judgment, see note 7 supra, the district court noted that
the failure to supply the Patent Office with the information
a
At the trial the parties presented dramatically differ-
ent versions of the facts to the jury. Plaintiff contended
that Ethicon had accumulated the Orsini and Gerard
patents, two key patents in the field, intending to
monopolize the industry; that Ethicon had initiated
and pursued its patent infringement suits against Hand-
gards and its predecessors in bad faith, i.e., with knowl-
edge that the patents were invalid, for the purpose
of monopolizing the market;’ that even if brought
in good faith, Ethicon’s infringement suits constituted
individual predatory acts in an overall scheme to monop-
olize; and that Ethicon had generated adverse publicity
regarding its infringement actions, threatening potential
pertaining to the Orsini patent, which already allegedly was
part of its files, did not constitute fraud on the Patent Office
in the Walker Process sense. In its 1975 decision on de-
fendant’s motion for summary judgment, the district court
formally held that Ethicon’s “failure to inform the Patent
Office of information in its own files does not amount to
the extremely circumscribed ‘intentional fraud’ necessary to
prove an action under Walker Process.” 413 F. Supp. at
923.
*Plaintiffs argued that the Gerard and Orsini patents were
known by Ethicon to be invalid because they claimed: (1) a
Mr. Babb had testified that Gerard had told him that he
knew the Gerard patent was invalid; (2) evidence had been
introduced suggesting that Ethicon knew of Shabram’s invali-
dating prior public use; (3) evidence had been introduced
suggesting (a) that Ethicon knew that Gerard’s invention had
been “on sale” more than one year prior to the date of
the filing of the patent application within the meaning of
35 U.S.C. § 102(b) and (b) that Ethicon’s patent attorneys
knowingly falsified an answer to an interrogatory in the prior
patent action regarding the “on sale” issue; (4) evidence
had been introduced suggesting that Ethicon’s patent attorneys
knowingly falsified an answer to an interrogatory in the prior
patent action concerning the date on which Gerard’s invention
had been reduced to practice, in an attempt to mislead Hand-
gards’ counsel into defending the suit on a more difficult
ground; and (5) evidence had been introduced suggesting
that Ethicon knew the Orsini patent to have been invalid
because of its having been anticipated or made obvious by
a prior patent.
an
customers of the plaintiff, with the result that vital
corporate resources were committed to defense of the
infringement actions, Handgards’ relations with potential
Customers were impaired, a proposed joint venture was
aborted, and the company found itself unable to obtain
outside financing necessary for it to remain competitive
in the industry. Defendant Ethicon countered by arguing
that it lacked any improper monopolistic motive in
its acquisition of the Gerard and Orsini patents; that
it had initiated the various infringement actions in
complete good faith, after careful investigation, and
with the reasonable expectation of success; that it did
not puclicize its infringement actions within the indus-
try; and that Handgards’ competitive problems resulted
from its having marketed a lower quality product, pro-
vided poorer service, and been unwilling to respond
to the competitive demands of the industry.
The jury returned a general verdict in favor of Hand-
gards in the amount of $2,073,000 prior to trebling
and gave the following responses to the special interrog-
atories submitted in the case: (1) the Orsini patent
was not invalid on the basis of prior disclosures of
another patent; (2) the relevant market in the case
consisted of the market of heat-seated plastic gloves
sold to manufacturers of home hair care coloring kits;
(3) Ethicon was guilty of monopolizing or attempting
to monopolize the relevant market by prosecuting the
patent lawsuits against Handgards and its predecessors
in bad faith, that is, with actual knowledge that either
the Gerard or the Orsini patent was invalid; (4) Ethicon
=
was guilty of monopolizing or attempting to monopolize
the relevant market by prosecuting the prior patent
action as a predatory act in an overall scheme designed
to exclude Handgards from the market; and (5) &
(6) Ethicon and Johnson & Johnson were not guilty
of entering into an agreement, combination, or conspira-
cy to restrain trade or to monopolize the relevant
market.
Ethicon advances six basic arguments on appeal:
(1) the trial court erred in instructing the jury that
the bad faith enforcement of a patent can, without
more, constitute an exclusionary act for which antitrust
liability may result; (2) the finding that Ethicon prose-
cuted its infringement actions in bad faith is based
upon pure speculation; (3) the jury’s finding that Ethi-
con possessed a valid patent (Orsini) which covered
the market found to have been monopolized precludes
entry of a verdict of illegal monopolization of that
market; (4) the trial court erred in permitting the
jury to determine the relevant market and instead should
have found that the relevant market was broader than
the one chosen by the jury; (5) Handgards failed
to show any injury resulting from the alleged section
2 violations by Ethicon; and (6) the trial court erred
in directing a verdict against Ethicon on its antitrust
counterclaim against Handgards. Because we conclude
that resolution of appellant’s contentions concerning
the bad faith theory and the damages recoverable in
a case of this sort necessitate reversal and remand
for a new trial, we need not, at this time, reach the
=
other issues urged by appellant. All such issues may
be presented to the trial court for such reconsideration
as it deems proper in the light of this opinion.
iI.
Antitrust Liability for
Patent Enforcement Conduct
A. The Problem.
We are confronted in this case with the complex
interaction between two conflicting bodies of law: One,
the patent law, is concerned with the creation and
commercial exploitation of a statutory grant of monop-
oly power; the other, the antitrust law, is concerned
with proscribing various kinds of monopoly power.”
0The power to exclude, which is the essence of every
patent, is monopoly power. Hence, “[fa]ny action to enforce
a patent is in a very explicit sense ‘exclusionary,’ both in
purpose and, if successful, in effect.” L. Sullivan, Handbook
of the Law of Antitrust § 181, at 522 (1977). See P.
Areeda & D. Turner, JJ] Antitrust Law § 704a, at 114-
15 (1978). The patent laws contemplate “broad criteria of
patentability while lodging in the federal courts final authority
to determine [patent validity], Blonder-Tongue Laboratories,
Inc. v. University Foundation, 402 U.S. 313, 332 (1971);
patentees invoke that authority by initiating infringement suits
to enforce their patents. The antitrust laws, on the other
hand, proscribe certain types of exclusionary conduct that
threaten or create monopoly power, including, in at least
some situations, the use of vexatious litigation. See, e.g., Otter
Tail Power Co. v. United States, 410 U.S. 366, on remand,
360 F. Supp. 451 (D. Minn. 1973), aff'd mem., 417 US.
901 (1974). It therefore is necessary to reach an accommodation
between the patent and the antitrust laws whenever antitrust
liability is premised on a finding regarding a patentee’s intent
to monopolize or its exercise of exclusionary power. To de-
termine the existence of section 2 liability properly requires
careful distinctions between lawful patent-related exclusionary
conduct or intent and unlawful patent-related exclusionary con-
duct or intent; only unlawful’ patent-related exclusionary con-
duct or intent is evidence of an intent to monopolize or
the exercise of exclusionary conduct within the meaning at-
tributed to section 2. See SCM Corp. v. Xerox Corp., No.
15,807, slip op. (D. Conn. Dec. 29, 1978). The task then,
—
Reconciling the interrelationship between the patent
and antitrust laws has long been a topic of concern
to courts as well as to commentators. See, e.g., Walker
Process Equipment, Inc. v. Food Machinery & Chemical
Corp., 382 U.S. 172 (1965); Rex Chainbelt, Inc. v.
Harco Products, Inc., 512 F.2d 993 (9th Cir.), cert.
denied, 423 U.S. 831 (1975); Kobe, Inc. v. Dempsey
Pump Co., 198 F.2d 416 (10th Cir.), cert. denied,
344 U.S. 837 (1952); P. Areeda & D. Turner, J/I
Antitrust Law 4 704a, at 114-15 (1978); L. Sullivan,
Handbook of the Law of Antitrust § 181 (1977);
and Stedman, Patents and Antitrust—The Impact of
Varying Legal Doctrines, 1973 Utah L. Rev. 588.
This case presents yet another instance in which the
boundaries of the patent-antitrust interface must be
determined.
Patentees must be permitted to test the validity of
their patents in court through actions against alleged
infringers. Their status as alleged possessors of a legal
monopoly does not cause them to be pariahs before
the law. Eastern Railroad Presidents Conference v.
Noerr Motor Freight, 365 U.S. 127 (1961) and United
Mine Workers v. Pennington, 381 U.S. 657 (1965)
require no less." On the other hand, infringement
is to “identify the point at which . . . [an attempt to
enforce a patent], always exclusionary in . . . [the] literal
sense, . . . become[s] so intractable as to warrant its being
called exclusionary in the sense relevant to the establishiment
of a Section 2 violation. . . .” L. Sullivan, supra, § 181,
at 522.
Jt is worth emphasizing that the absence of an immunity
does not create an antitrust offense. The fact that de-
fendant’s conduct is not immune from antitrust scrutiny
does not satisfy the plaintiffs burden of proving the
usual elements of an antitrust offense, including significant
harm causally related to the conduct.
P. Areeda & D. Turner, supra, I Antitrust Law © 204e2.
(This footnote is continued on next page)
—"
actions initiated and conducted in bad faith contribute
nothing to the furtherance of the policies of either
the patent law or the antitrust law.’* The district
court was correct in holding, in effect, that such actions
may constitute an attempt to monopolize violative of
Section 2 of the antitrust law.’* “Bad faith,” however,
See California Motor Transport Co. v. Trucking Unlimited,
404 U.S. 508 (1972); Otter Tail Power Co. v. United States,
410 U.S. 366, on remand, 360 F. Supp. 451 (D. Minn.
1973), aff'd mem., 417 U.S. 901 (1974); Franchise Realty
Interstate Corp. v. San Francisco Local Joint Executive Board
of Culinary Workers, 542 F.2d 1076 (9th Cir. 1976), cert.
denied, 430 U.S. 940 (1977).
12Subjecting a potential rival or actual rival to...
[the burden of defending an infringement suit] may weaken
him or even dissuade him from beginning or continuing
the rivalry with the monopolist-patentee—and perhaps
without regard to the merits of the infringement claim.
P. Areeda & D. Turner, supra, III Antitrust Law 4 708,
at 145. See generally L. Sullivan, supra, § 181; Stedman,
supra, at 593-94.
8An antitrust plaintiff pursuing a bad faith patent prosecution
theory must still prove the other requisites of a § 2 offense.
In Walker Process the Supreme Court emphasized the need
to demonstrate the patentee’s possession of exclusionary power
within the relevant market before antitrust liability would result.
To establish monopolization or attempt to monopolize
a part of trade or commerce under § 2 of the Sherman
Act [on a Walker Process theory], it would .
be necessary to appraise the exclusionary power of the
illegal patent claim in terms of the relevant market for
the product involved. Without a definition of that market
there is no way to measure . . . [defendant’s] ability
to lessen or destroy competition. It may be that the
[patented] device . . . does not comprise a relevant
market. There may be effective substitutes for the device
which do not infringe the patent. This is a matter of
proof, as is the amount of damages...
382 U.S. at 177-78.
We note the existence of a jury finding in this case that
the relevant market consisted of the market of heat-sealed
plastic gloves sold to manufacturers of home hair care coloring
kits, or the home hair care plastic disposable glove market;
=| oe
is a subjective state of mind the existence of which,
while not susceptible to certain proof, easily can spring
from suggestive and weakly corroborative circum-
stances.
The problem, as we see it, is to provide the means
whereby the bad faith infringement action can be iden-
tified post hoc with a sufficiently high degree of cer-
tainty to make it highly improbable that the action
in fact was brought in good faith. The imposition
of treble damages, a sanction strongly punitive, see
Walker Process, supra, 382 U.S. at 180 Harlan, J.,
concurring) and P. Areeda & D. Turner, supra, Il
Antitrust Law 944 311, 331, dictates that such means
exist. For reasons which appear below the solution
of this problem points the way to the proper disposition
of this case.
B. The Solution.
Our search for a solution commences by distinguish-
ing the facts of this case from those of the cases
on which appellee Handgards primarily relies. First,
this is not a Walker Process case. Walker Process
stands for the proposition that “the enforcement of
a patent procured by fraud on the Patent Office” may
give rise to antitrust liability. See notes 6 & 7 supra.
Plaintiff Handgards does not contend that Ethicon
a market coterminous with that covered by the Gerard patent.
In view of that finding, Ethicon’s prosecution of a bad faith
infringement action likely would constitute an attempt to monop-
olize violative of section 2. The requisite intent to monopolize
in this case could be inferred from the finding of bad faith.
Not all bad faith infringement actions will necessarily constitute
attempts to monopolize violative of section 2. Nor will a patentee
found guilty of prosecuting an infringement action in bad
faith necessarily be guilty of an offense of monopolization.
The imposition of antitrust liability will depend upon plaintiff's
proof that the defendant-patentee possessed or threatened to
possess an ability to lessen competition in the relevant market.
on
sought to enforce a fraudulently-procured patent. In-
stead, Handgards asserts that Ethicon prosecuted in-
fringement actions in bad faith, that is, with knowledge
that the patents, though lawfully-obtained, were in-
valid.
Second, this is not a Kobe case. Kobe, Inc. v. Demp-
sey Pump Co., 198 F.2d 416 (10th Cir.), cert. denied,
344 U.S. 837 (1952). In Kobe a patentee had engaged
in a plan of monopolization by acquiring all present
and future patents relevant to an industry, obtaining
covenants not to compete from those from whom it
purchased the patents, publicizing its infringement suits
throughout the industry, and threatening suit against
anyone trading with the alleged infringer. Kobe and
its progeny, among which is Rex Chainbelt, supra, hold
that a patentee may incur antitrust liability for even
the good faith prosecution of a valid patent where
it is shown that the infringement suit “was brought
in furtherance and as an integral part of a plan to
violate the antitrust laws.” Rex Chainbelt, supra, 512
F.2d 1005-06."* Our careful examination of the record
in this case reveals that no evidence of any overall
scheme to monopolize exists apart from allegations that
4The issue in Rex Chainbelt was whether Harco could
recover attorneys’ fees incurred in its successful defense of
a patent infringement suit as damages resulting from an anti-
trust violation by Rex Chainbelt. After studying the Report
of the Attorney General's National Committee to Study the
Antitrust Laws 247-48 (1955) and a line of cases highlighted
by Kobe, supra and Ansul Co. v. Uniroyal, Inc., 448 F.2d
872 (2d Cir. 1971), cert. denied, 404 U.S. 1018 (1972),
we concluded that “|t]he mere coincidence of an antitrust
violation [an illegal tying arrangement] and a patent infringe-
ment suit is not sufficient to entitle Harco to attorneys’ fees
expended in defense of the patent infringement claim absent
some showing from which the . . . court can find or infer,
that the patent infringement suit was brought in furtherance
and as an integral part of a plan to violate the antitrust
laws.” 512 F.2d at 1005-06 (emphasis added).
a
directly relate to the bad faith prosecution charges.
The old wine in this case consists of evidence indicating
that Ethicon may have brought the infringement actions
in bad faith. It is the same old wine when put in
a new bottle labelled “overall scheme.””®
15The district court instructed the jury on both the “bad
faith” and “overall scheme” theories, stating that “[the prosecu-
tion] of one or more ill-founded patent infringement actions
in bad faith . . . constitutes an antitrust violation in and
of itself if such suits are initiated or pursued with an intent
to monopolize a particular market or industry,” Reporter’s
Transcript at 2134, and that “if . . . the lawsuits instituted
by Ethicon against plaintiff were brought or maintained in
whole or in part to further a plan or a scheme... to
monopolize . . . or in furtherance of a conspiracy or combina-
tion to monopolize or restrain trade . . . [then] the institution
and maintenance of these suits violate the antitrust laws, even
though the defendants may actually have believed that the
. . . patents were valid, and even though the defendants
believed that Handgards had infringed these patents.” Jd. at
2151. The court defined “bad faith” in this context as “know-
ing either at the time the lawsuit is filed or during its pendency
that the particular patent sued upon is invalid.” Jd. at 2134.
Proof of bad faith, the court charged, must be shown by
a preponderance of the evidence, which it described as proof
that the proposition is “more likely true than not true.” Id.
at 2095.
The district court summarized the evidence pertaining to
the overall scheme for the jury as follows:
. . . [U]nder the overall scheme theory, the plaintiffs
contend that the defendants accumulated numerous patents
on plastic gloves to prevent competition; that they threat-
ened to sue manufacturers, or purchasers, of allegedly
infringing gloves, and misused the Gerard patent.
To support this claim, the plaintiff introduced Gerard’s
letter to Sam Porter, claiming that anyone manufacturing
gloves on paper was in violation of his patent, and
was subject to suit for patent infringement.
The plaintiff also presented the testimony of Mr. Webbe
regarding the difficulty that Handgards encountered ob-
taining financing for its operations.
Mr. Campbell, a past employee of Glore Forgan, also
testified that his company would not become involved
in underwriting the sale of Handgards’ stock, because
of the pendency of the infringement suit.
(This footnote is continued on next page)
=
Finally, this is not an Otter Tail case. Otter Tail
Power Co. v. United States, 410 U.S. 366, on remand,
360 F. Supp. 451 (D. Minn. 1973), aff'd mem., 417
U.S. 901 (1974). Handgards has neither pleaded nor
Mr. Webbe also testified as to the reluctance of Sam
Porter to enter into a joint venture because of the pending
suit. And Porter, similarly, testified regarding his concern
over the infringement action.
The defendants presented the following evidence to re-
fute the plaintiff's claim that the patent suits were brought
as part of an overall scheme to monopolize.
Messrs. Laff and Neuman both testified that the patent
actions were filed against Plasticsmith and Mercury Manu-
facturing because Ethicon were unsure of the relationship
between the two companies.
Mr. Laff explained that Delaware was chosen as the
place to sue, because it was more convenient for Ethicon;
and that after the court ordered the case transferred
to San Francisco, Ethicon did not oppose the consolida-
tion of the lawsuit against Mercury, so the action could
be tried as one lawsuit.
Messrs. Laff and Neuman testified that the lawsuit
was begun against Mr. Reidy when it was learned that
Mr. Reidy paid for some of the accused machines.
The evidence shows Ethicon offered Handgards a license
under the Gerard patent prior to the lawsuit.
Mr. Webbe and Mr. Blatz have testified that in their
opinion the license offered was not reasonable, and would
have put Handgards at a competitive disadvantage.
Messrs. Laff, Neuman, and Schlemmer, testified that
the letter from Mr. Gerard to Mr. Porter, dated March
16th, 1965, in which Mr. Gerard enclosed a copy of
his patent, did not constitute a misuse of the Gerned
patent.
The evidence shows that as of at least the date of
that letter, all disposable plastic gloves purchased by hair
care kit companies were manufactured under the Gerard
process.
Mr. Gerard and Mr. Porter testified that the letter
was sent at the specific request of Mr. Porter.
Messrs. Laff, Neuman, and Schlemmer testified that
no one except a manufacturer of gloves could have been
sued under the Gerard patent, which was the sole object
of that letter.
Id. at 2114-16.
As we indicated in the text, our review of the record
convinces us that only the bad faith theory of recovery exists
in this case. The evidence of an overall scheme to monopolize
— =
proved that Ethicon engaged in a pattern of baseless,
repetitive litigation designed to prevent meaningful ac-
cess to an adjudicatory tribunal. See generally Franchise
Realty Interstate Corp. v. San Francisco Local Joint
Executive Board of Culinary Workers, 542 F.2d 1076,
1081 n.4, 1087 (9th Cir. 1976), cert. denied, 430
U.S. 940 (1977)."°
Rather, this case involves simply the commencement
and maintenance of related infringement actions in
what the jury found to be bad faith.
A clash between the policies of patent and antitrust
laws also was present in Walker Process and Kobe.
In the former the compromise consisted of erecting
high barriers to success by the antitrust plaintiff. As
the relevant market constitutes substantially the same evidence
relied upon to show Ethicon’s alleged bad faith prosecution
conduct. If this evidence, under the instructions our opinion
requires, should fail to support the bad faith theory, it should
not be sufficient to support the overall scheme theory. To
hold otherwise would undercut the protections we here seek
to afford the ordinary patentee. For this reason we are unable
to affirm the judgment below on the basis of the jury’s finding
that an overall scheme exisied. It is unnecessary for us to
address explicitly the issue whether the trial court erred in
charging the jury on two theories. It is enough to point
out that if on retrial the evidence remains substantially the
same, the charge to the jury should reflect only the bad
faith theory. We express no opinion on the type of additional
evidence that would require an overall scheme charge. Kobe,
Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th Cir.),
cert. denied, 344 U.S. 837 (1952) is the archetype, however.
16Judge Kennedy’s opinion, concurring in the result and
qualifiedly concurring in the majority’s opinion, suggests that
defendant Ethicon may have available on remand the “im-
munity” afforded by Franchise Realty. Our opinion treats “in-
fringement actions initiated and conducted in bad faith,” estab-
lished in the manner we require, as violative of Section
2 of the antitrust law. When so established, it would be
strange to then hold that nonetheless a Franchise Realty im-
munity might exist. In any event, this is an issue that the
present record does not require us to address,
lilies
we noted in Cataphote Corp. v. DeSoto Chemical Coat-
ings, Inc., 450 F.2d 769 (9th Cir. 1971), cert. denied,
408 U.S. 929 (1972):
The patent fraud proscribed by Walker is ex-
tremely circumscribed. In Walker the Supreme
Court excluded from its definition of fraud “an
honest mistake as to the effect of prior installation
upon patentability—so-called ‘technical fraud.’ ”
Walker, supra, at 177 . . .. Wholly inadvertent
errors or honest mistakes which are caused by
neither fraudulent intent or design, nor by the
patentee’s gross negligence, do not constitute fraud
under Walker. . . . The road to the Patent
Office is so tortuous and patent litigation is so
complex, that “knowing and willful fraud” as the
term is used in Walker can mean no less than
clear, convincing proof of intentional fraud in-
volving affirmative dishonesty, “a deliberately
planned and carefully executed scheme to defraud
* * * the Patent Office.” . . . Patent fraud
cases prior to Walker required a rigorous standard
of deceit. ... Walker requires no less.
450 F.2d at 772 (emphasis added) (footnote and
citations omitted). See SSP Agricultural Equipment,
Inc. v. Orchard-Rite Ltd., Nos. 76-3406 & 76-3389
(Slip op. at 756, 764 (9th Cir. Mar. 12, 1979).
In overall scheme cases such as Kobe, courts require
proof of an overall scheme to monopolize independent
of the mere commencement of an infringement suit
before permitting the imposition of antitrust liability
based on patent enforcement conduct. This requirement
diminishes the specter of antitrust liability encountered
by an ordinary patentee who brings an infringement
action. See Hibner, Litigation as an Overt Act—De-
uniliiian
velopment and Prognosis, 46 Antitrust L.J. 718, 720.
(1977).
The common thread is that in both Walker Process
and Kobe barriers were erected to prevent frustration of
patent law by the long reach of antitrust law. This
suggests our proper course. It is to erect such barriers
to antitrust suits as are necessary to provide reasonable
protection for the honest patentee who brings an in-
fringement action to protect his legal monopoly.
A proper barrier is, in our opinion, suggested by
Walker Process. It is that the jury should be instructed
that a patentee’s infringement suit is presumptively
in good faith and that this presumption can be rebutted
only by clear and convincing evidence. See Cataphote
Corp., supra, 450 F.2d at 772; SSP Agricultural Equip-
ment, supra. Such an instruction accords the patentee
a presumption commensurate with the statutory pre-
sumption of patent validity set forth in the patent
laws, 35 U.S.C. § 282, which can only be rebutted by
a showing of clear and convincing evidence. See, e.g.,
Santa Fe-Pomeroy, Inc. v. P & Z Co., 569 F.2d
1084, 1091 (9th Cir. 1978); Saf-Gard Products, Inc.
v. Service Parts, Inc., 532 F.2d 1266, 1271 (9th
Cir.), cert. denied, 429 U.S. 896 (1976).
The trial court in this case, however, gave no such
instruction. See note 15 supra. Moreover, it charged
that the patentee’s subjective bad faith need only be
proved by a mere preponderance of the evidence. This
constitutes reversible error. The district court charge
eliminates a barrier we hold necessary, and were it
accepted as proper, “might well chill” legitimate patent
enforcement efforts “because of fear of the vexations
or punitive consequences of treble damage suits.”
Walker Process, supra, 382 U.S. at 180 (Harlan, J.,
—
concurring). The barrier we impose is not one intended
to be utilized in antitrust litigation generally. It is
fashioned in response to the unique characteristics of
proceedings in which the alleged violation of the anti-
trust law consists solely of one or more infringement
actions initiated in bad faith.
IIT.
Damages Recoverable By Victims of Bad Faith
Infringement Actions.
Difficulty also exists with respect to the trial court’s
charge to the jury concerning the nature of the injuries
for which plaintiff properly may recover damages
in an antitrust suit based upon a bad faith prosecution
theory. “The Supreme Court has recently ruled that
the only damages recoverable in an antitrust suit are
those which occur by reason of that which made the
defendant’s actions unlawful.” Kapp v. National Foot-
ball League, 586 F.2d 644, 648 (9th Cir. 1978)
(citing Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc.,
429 US. 477, 489 (1977)). Brunswick states the
applicable rule and is the governing authority:
. .. [Flor plaintiffs to recover treble damages
. they must prove more than injury causally
linked to . . . [the antitrust violation]. Plaintiffs
must prove antitrust injury, which is to say injury
of the type the antitrust laws were intended to
prevent and that flows from that which makes
defendant’s acts unlawful. The injury should re-
flect the anticompetitive acts made possible by
the violation. It should, in short, be “the type
of loss that the claimed violations . . . would
be likely to cause.” Zenith Radio Corp. v. Hazel-
tine Research, 395 US. at 125.
a
429 U.S. at 489 (emphasis in original) (footnote omit-
ted).
Plaintiff must show that the injury for which it
seeks to recover is “the type the antitrust laws were
intended to prevent” and “flows from that which makes
defendant’s acts unlawful.” In a suit alleging antitrust
injury based upon a bad faith prosecution theory it
is obvious that the costs incurred in defense of the
prior patent infringement suit are an injury which
“flows” from the antitrust wrong. Damages for the
loss of profits, however, will not necessarily so flow.
We have some doubt, for example, whether plaintiff's
damage claim for lost profits allegedly resulting from
the entry of an additional competitor into the market
during the pendency of the infringement suit is the
type of injury for which antitrust recovery is appro-
priate. “The antitrust laws . . . were enacted for the
protection of competition, not competitors.” Brunswick,
supra, 429 U.S. at 488 (quoting Brown Shoe Co.
v. United States, 370 U.S. 294, 320 (1962)). More-
over, the jury’s finding in this case that Ethicon pos-
sessed a valid patent covering the market it was accused
of monopolizing also raises doubts concerning whether
plaintiff's lost profits “flowed from” the antitrust wrong
claimed in this case.
The court’s charge concerning the damages available
to plaintiff for lost profits is ambiguous. Several times
the court stated that plaintiff could only recover for
lost profits that it would have earned “but for” the
antitrust violation by the defendant. See Reporter’s
Transcript at 2160, 2162. The court also stated how-
ever, that plaintiff could recover as damages profits
lost as the “proximate result” of the antitrust violation.
Id. at 2163. The court earlier had defined the term
—
“proximate cause” to mean “an act... [that] played
a substantial part in bringing about” the injury. 7d.
at 2161. According to Brunswick, plaintiff must show
more than that it suffered injury causally linked -.o
the antitrust violation; the injury must be shown to
have “flowed” from the wrong. To ‘flow’ from the
wrong, Brunswick suggests, the loss must be “ ‘the
type of loss that the claimed violations . . . would
be likely to cause.’” 429 U.S. at 489, quoting from
Zenith Radio Corp. v. Hazeltine Research, 395 U.S.
100, 125 (1969). To be one of several causes is
not enough. The injury must be of the type likely
to be caused by the defendant’s bad faith infringement
action. On the record before us we are left in doubt
whether the Brunswick test has been met with respect
to plaintiff's claim for lost profits. The failure of the
trial court to resolve this doubt specifically constitutes
error.
IV.
The Reasonable Balance.
The additional burdens imposed by our holdings
on those who seek an antitrust recovery against one
who has brought a patent infringement action against
them achieve what we believe to be a reasonable accom-
modation of the policies of patent and antitrust law.
Patent holders must be cautious in bringing infringe-
ment actions and alleged infringers remain equipped
with a strong retaliatory weapon available for use
against those who sue them in bad faith.'’ We think
this represents a reasonable balance.
7We note that substantial disincentives to instigating ill-
founded patent infringement suits that are not actionable under
the standard of antitrust liability announced today already
exist. For example, the patent laws contain a specific remedy
for prosecution in bad faith, 35 U.S. § 285; the rule of
~—
Accordingly, this case is reversed and remanded to
the district court for a new trial in accordance with
the views expressed herein. Each party to this appeal
shall bear its own costs and neither party’s costs shall
be taxed against the other. Rule 39, F.R. App. P.
REVERSED and REMANDED.
Re: Handgards, Inc. v. Ethicon, Inc., No. 76-3150.
KENNEDY, Circuit Judge, Concurring:
I concur in the principal holdings of Judge Sneed’s
well reasoned opinion, but think it is unnecessary to
address the question whether or not the defendant Ethi-
con could rely on an immunity granted to antitrust
defendants under the principles set forth in Franchise
Realty Interstate Corp. v. San Francisco Local Joint
Executive Board of Culinary Workers, 542 F.2d 1076
(9th Cir. 1976). The matter was not raised by Ethicon
at any stage of these proceedings. Since a new trial
is required in this case, because of the erroneous jury
instructions noted by the majority, the district court
in the first instance should determine whether Ethicon
may raise the question on retrial.’
collateral estoppel announced in Blonder-Tongue Laboratories,
Inc. v. University Foundation, 402 U.S. 313 (1972) serves
to dissuade ill-founded patent infringement suits; and nothing
appears to preclude a successful defendant in an infringement
action from bringing a common law malicious prosecution
claim. Moreover, this opinion does not limit any antitrust liability
that a patentee may incur for conduct actionable under an
overall scheme or Walker Process theory.
11f we were required to decide the issue, Ethicon’s failure to
raise it might have been important. I am unaware of a case
deciding whether the sham exception states an affirmative de-
fense to an antitrust complaint—so that Ethicon would have
waived the defense by not raising it—or whether it instead
identifies an essential element of an antitrust plaintiff’s claim,
in which case an appellate court might be entitled to pass on
the issue even though it was not raised below.
—_,)
In Franchise Realty we held that an antitrust plaintiff
must plead that the litigation or petitions which alleged-
ly caused competitive injury were sham proceedings,
the showing required by a line of Supreme Court
decisions, see Eastern Railroad Presidents Conference
v. Noerr Motor Freight, 365 U.S. 127 (1961), United
Mine Workers v. Pennington, 381 U.S. 657 (1965),
California Motor Transport.Co. v. Trucking Unlimited,
404 U.S. 508 (1972), Otter Tail Power Co. v. United
States, 410 U.S. 366 (1973), Vendo Co. v. Lektro-
Vend Corp., 433 U.S. 623 (1977). Franchise Realty
might be interpreted to require dismissal of antitrust
claims unless the plaintiff can show that the defendant’s
conduct was designed to cause competitive injury by
exacting such extraordinary costs that meaningful use
of an agency or tribunal was barred, see 542 F.2d
at 1080-81 & n.4, and perhaps to require further
that the defendant must have engaged in conduct other
than instigation and maintenance of the proceedings,
see id. See also Wiltmorite, Inc. v. Eagan Real Etsate,
Inc., 454 F. Supp. 1124 (N.D.N.Y. 1977); Ernest
W. Hahn, Inc. v. Codding, 423 F. Supp. 913 (N.D.
Cal. 1976). Whether this is a correct interpretation
of Franchise Realty or the Sherman Act, cf. P. Areeda
& D. Turner, Antitrust Law §§ 201-204, 203c n9
at 44-45 (1978), and whether Ethicon’s conduct was
actionable under such standards are important ques-
tions, but the issues are not presented for consideration
here.
The majority opinion seems to suggest that a showing
of sham proceedings under Franchise Realty is not
required where the claimed antitrust injury flows from
patent litigation, but it does not indicate the respects
in which patent litigation somehow presents a greater
|
threat to interests protected by the Sherman Act than
other types of suits governed by California Motor and
Franchise Realty. Any such rule would appear at odds
with the principal holding that a special burden of
proof is required before an antitrust plaintiff may pre-
vail on the claim of injury from a previous patent
litigation, our purpose being to avoid undue discourage-
ment to the adjudication of patent infringement claims.
In my view whether this case can be distinguished
from Franchise Realty is best left for a later decision
when the point has been specifically raised by the
parties to the case.
Finally, I do not understand the majority to hold
that in all antitrust cases, the plaintiff must show
that the antitrust violation was a “predominant,” as
opposed to a “substantial” cause of his injury. Cf.
Mulvey v. Samuel Goldwyn Productions, 433 F.2d
1073, 1075 n.3 (9th Cir. 1970); Hecht v. Pro-Football,
Inc., 570 F.2d 982, 996 (D.C.Cir. 1977); Billy Baxter,
Inc. v. Coca-Cola Co., 431 F.2d 183, 187 (2d Cir.
1970); E. Devitt & C. Blackmar, Federal Jury Practice
and Instructions §§ 90.31, 80.18 (1977) (“proximate
cause” in antitrust cases defined in terms of “substan-
tial factor”). But to the extent that the causation
rule applies only to antitrust claims based on prior
patent infringement actions, the majority similarly does
not explain why a different causation rule is appropriate
in this kind of case. Brunswick Corp. v. Pueblo Bowl-
O-Mat, Inc., 429 U.S. 477 (1977), is squarely in
point for our holding that the injury must result from
a competitive wrong prohibited by the antitrust laws,
but in my view it should not be interpreted to introduce
a new standard such as “predominant” cause for patent
cases, when the question is simply whether or not
—
the antitrust wrong was a proximate cause of the
alleged injury.
With the above observations, I concur in the opinion
of the majority.
/s/ Anthony M. Kennedy
United States Circuit Judge
—29—
APPENDIX 2.
Order.
United States Court of Appeals, for the Ninth Cir-
cuit.
Handgards, Inc., a Corporation, Plaintiff-Appellee,
v. Ethicon, Inc., a Corporation, Defendant-Appellant.
No. 76-3150.
Filed: July 27, 1979.
Before: SNEED and KENNEDY, Circuit Judges, and
VON DER HEYDT,* District Judge.
The panel as constituted in the above case has
voted to modify the opinion heretofore filed in the
respects hereinafter set forth. With such modifications,
the panel has voted to deny the petition for rehearing.
Judges Sneed and Kennedy have voted to deny the
suggestion for rehearing en banc, and Judge von der
Heydt has recommended such rejection.
The full court has been advised of the suggestion
for en banc rehearing and of the vote and recommenda-
tion of the panel, and no judge of the court has
requested a vote on the suggestion for rehearing en
banc. Fed. R. App. P. 35(b).
The majority opinion heretofore filed herein is mod-
ified in the following respects:
1. The following sentence is added at page 8, line
16: “All such issues may be presented to the trial
court for such reconsideration as it deems proper in
the light of this opinion.”
2. The following paragraph is inserted at page 13,
line 9:
*Honorable James A. von der Heydt, Chief Judge, United
States District Court, District of Alaska, sitting by designation.
_ oo
“The barrier we impose is not one intended to be
utilized in antitrust litigation generally. It is fashioned
in response to the unique characteristics of proceedings
in which the alleged violation of the antitrust law
consists solely of one or more infringement actions
initiated in bad faith.”
3. The following passage is substituted for page
14, line 31, and page 15, lines 1-5:
“from the wrong. To ‘flow’ from the wrong, Brunswick
Suggests, the loss must be “ ‘the type of loss that
the claimed violations . . . would be likely to cause.’”
429 US. at 489, quoting from Zenith Radio Corp.
v. Hazeltine Research, 395 U.S. 100, 125 (1969).
To be one of several causes is not enough. The injury
must be of the type likely to be caused by the defend-
ant’s bad faith infringement action. On the record
before us we are left in doubt whether the Brunswick
test has been met with respect to plaintiff's claim
for lost profits. The failure of the trial court to resolve
this doubt specifically constitutes error.”
4. The following sentence is added at page 15,
line 19: “Each party to this appeal shall bear its
own costs and neither party’s costs shall be taxed
against the other. Rule 39, F. R. App. P.”
The concurring opinion by Judge Kennedy now on
file is replaced by the modified concurrence attached.
The petition for rehearing is denied and the petition
for rehearing en banc is rejected.
—31i—
Re: Handgards, Inc. v. Ethicon, Inc. No. 76-3150.
KENNEDY, Circuit Judge, concurring:
I concur in the result of Judge Sneed’s opinion,
and think it inappropriate to address the question wheth-
er or not Ethicon could rely on an immunity granted
to antitrust defendants under the principles set forth
in Franchise Realty Interstate Corp. v. San Francisco
Local Joint Executive Board of Culinary Workers, 542
F.2d 1076 (9th Cir. 1976), cert. denied, 430 USS.
940 (1977). The matter was not raised by Ethicon
at any stage of these proceedings. Since a new trial
is required in this case, because of the erroneous jury
instructions noted by the majority, the district court
in the first instance should determine whether Ethicon
may raise the question on retrial.
In Franchise Realty we held that an antitrust plain-
tiff must plead that the litigation or petitions which
allegedly caused competitive injury were sham proceed-
ings, the showing required by a line of Supreme Court
decisions, see Eastern Railroad Presidents Conference
v. Noerr Motor Freight, 365 U.S. 127 (1961), United
Mine Workers v. Pennington, 381 U.S. 657 (1965),
California Motor Transport Co. v. Trucking Unlimited,
404 U.S. 508 (1972), Otter Tail Power Co. v. United
States, 410 U.S. 366 (1973), Vendo Co. v. Lektro-
Vend Corp., 433 U.S. 623 (1977). Franchise Realty
might be interpreted to require dismissal of antitrust
claims unless the plaintiff can show that the defendant’s
conduct was designed to cause competitive injury by
exacting such extraordinary costs that meaningful use
of an agency or tribunal was barred, see 542 F.2d
at 1080-81 & n.4, and perhaps to require further
that the defendant must have engaged in conduct other
than instigation and maintenance of the proceedings,
~~
see id. See also Wiltmorite, Inc. v. Eagan Real Estate,
Inc., 454 F. Supp. 1124 (N.D.N.Y. 1977); Ernest
W. Hahn, Inc. v. Codding, 423 F. Supp. 913 (N.D.
Cal. 1976). Whether this is a correct interpretation
of Franchise Realty or the Sherman Act, cf. P. Areeda
& D. Turner, Antitrust Law § 201-204, 203c n.9
at 44-45 (1978), and whether Ethicon’s conduct was
actionable under such standards are important ques-
tions, but the issues are not presented for consideration
here.
The majority opinion seems to suggest that a showing
of sham proceedings under Franchise Realty is not
required where the claimed antitrust injury flows from
patent litigation, but it does not indicate the respects in
which patent litigation somehow presents a greater threat
to interests protected by the Sherman Act than other
types of suits governed by California Motor and Fran-
chise Realty. It is irrelevant that a successful plaintiff ina
patent action is enforcing a lawful monopoly. Very cost-
ly “sham” unfair competition or tort suits, for example,
may produce more anticompetitive injury than less cost-
ly but successful infringement actions. Moreover, it
is difficult to argue that a successful plaintiff has
engaged in sham litigation. But to the extent that
the patent plaintiff is unsuccessful, I see little reason
to distinguish patent litigation from other kinds of
litigation. If attempted enforcement of a patent known
to be invalid is the special circumstance which justifies
a special rule, the court’s opinion states no reason
to depart from the requirement that a plaintiff prove
knowing, intentional fraudulent procurement as stated
in Walker Process. To the extent that abuse of the
judicial process by bad faith prosecution of a claim
=
known to be without merit is the essence of the antitrust
violation, the court’s opinion states no reason for depart-
ing from the circuit’s precedents, see Franchise Realty,
governing this type of antitrust violation. Further, a
more lenient rule for patent litigation appears at odds
with the principal holding that a special burden of
proof is required before an antitrust plaintiff may pre-
vail on the claim of injury from a previous patent
litigation, our purpose being to avoid undue discourage-
ment to the adjudication of patent infringement claims.
In my view, however, whether and why the kind of
antitrust litigation permitted in Walker Process is dis-
tinguishable in meaningful ways from that discussed
in California Motor, the relationship between the differ-
ent standards applied in those cases, and the applicabili-
ty of Franchise Realty to this case, are best left for
a later decision when the point has been specifically
raised by the parties.’
Finally, the majority states that in proving injury
“flowing from” an antitrust violation, “To be one of
several causes is not enough.” To the extent this lan-
guage suggests a change in the normal standards regard-
ing causation in antitrust cases, the statement is unex-
1Defendant’s position on this appeal was that antitrust claims
based on the prior bringing of infringement actions differ
from other kinds of antitrust suits based on alleged abuse
of the judicial system. It expressly declined to rely on California
Motor, stating in its brief: “The only relevance of California
Motor Transport, which had nothing to do with patents, is
its explicit reaffirmation by the Supreme Court of Walker
Process as the applicable standard of fraud in connection
with a § 2 case charging enforcement of invalid patents.”
Appellant’s Brief at 27. Instead, defendants argued that this
case was governed by Walker Process. They claimed plaintiff
should have been required to prove common law intentional
fraud, not merely bad faith, and that the standard of proof
should have been clear and convincing instead of a prepon-
derance of the evidence. Their second argument is adopted
in Judge Sneed’s opinion.
Se
a *
plained. There is no need in this case to reexamine
the rule that “proximate cause” in antitrust cases is
defined in terms of “a substantial cause.” See Mulvey
v. Samuel Goldwyn Productions, 433 F.2d 1073, 1075
n.3 (9th Cir. 1970); Hecht v. Pro-Football, Inc., 570
F.2d 982, 996 (D.C. Cir. 1977); Billy Baxter, Inc.
v. Coca-Cola Co., 431 F.2d 183, 187 (2d Cir. 1970);
E. Devitt & C. Blackmar, Federal Jury Practice and
Instructions §§ 90.31, 80.18 (1977) (proximate
cause” in antitrust cases defined in terms of “substan-
tial factor”). To the extent the language applies only
to antitrust claims based on prior patent infringement
actions, the majority similarly does not explain why
a different causation rule is appropriate in this kind
of case. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc.,
429 U.S. 477 (1977), is squarely in point for our
holding that the injury must result from a competitive
wrong prohibited by the antitrust laws, but in my
view it should not be interpreted to introduce a new
standard for proving causation either in antitrust cases
generally or antitrust claims based on prior patent
litigation. I am not as sure as Judge Sneed that part
of Handgards’ damages claim was for lost profits result-
ing from the entry of an additional competitor, but
I agree that the effect of the Orsini patent on plain-
tiffs claim of injury creates an issue which the district
court should decide.
With the above observations, I concur in the opinion
of the majority.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.