Appendix — DEERING MILLIKEN RESEARCH v. DUPLAN CORP. (Nos. 79-658, 79-644, 79-659, 79-660)

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Supreme Court of the United States IR CLERK |

October Term, 1979 "

Nos. 79-658

DEERING MILLIKEN RESEARCH CORPORATION

and MOULINAGE ET RETORDERIE DE CHAVANOZ,

Petitioners,

IN THE OCT 22 1979

(oe

DUPLAN CORPORATION, e¢ ai.,

Respondents.

—and—

DEERING MILLIKEN, INC.,

Petitioner,

DUPLAN CORPORATION, e¢ al.,

Respondents.

—and—

ATELIERS ROANNAIS DE CONSTRUCTIONS

TEXTILES, et al.,

Petitioners,

DUPLAN CORPORATION, et al.,

Respondents.

JOINT APPENDIX TO PETITIONS

FOR WRIT OF CERTIORARI

[Counsel for the several Petitioners are listed overleaf.]

TABLE OF CONTENTS

PAGE

{on verso of front cover] Memorandum Opinion of the District Court

[Duplan Corp. v. Deering Milliken, Inc., 444 F.

Pavt, Weiss, RirKixp, Warton & Garrison Supp. 648 (D.S.C. 1977) (Dupree, Ft RR ga Al

45 Park Avenue

° on Saks New York 10022 Supplemental Findings of the District Court

(212) 644-8000 [Extracts from the findings of fact proposed by

Litechnn tee Datiiueses the parties, as adopted by the District Court and

. Deering Milliken Research Corporation incorporated by reference in its Memorandum

ond Moulins 44 tatenderis de Cheveses MNS a ett ee A280

Findings Relating to the Horizontal Conspiracy:

a ee Liability of Chavanoz and DMRC

142 Huntington Street Plaintiffs’ Proposed Findings (Adopted) .... A280

New Haven, Connecticut 06511 Chavanoz/DMRC/DMI Proposed Findings

(203) 776-7662 GMI 55 5500 6s x es ied ee esekn cn , A349

Attorney for Petitioner

Pe ARCT-France Proposed Findings (Adopted) A385

Deering Milliken, Inc.

ARCT, Ine. Proposed Findings (Adopted) .. A388

BrumBaucu, Graves, Dononve & Raymonp Findings Relating to the Horizontal Conspiracy :

30 Rockefeller Plaza Liability of DMI

New York, New York 10020 ae a

(212) 489-3300 Plaintiffs’ Proposed Findings (Adopted) .... A406

Attorneys for Petitioners

Ateliers Roannais de Constructions

Textiles, et al.

Opinion of the Court of Appeals

[Duplan Corp. v. Deering Milliken Inc., 594 F.2d

979 (4th Cir. 1979) ]

Memorandum Opinion of the District Court

[Reported at 444 F’. Supp. 648 (D.S.C. 1977) ]

[648] The Durtan Corporation, et al.,

Plaintiffs,

DrERING MiLuikeN, Inc., Deering Milliken Research Corpo-

ration, Moulinage et Retorderie de Chavanoz, Ateliers

Roannais de Constructions Textiles, and ARCT, Ine.,

Defendants.

Civ. A. No. 71-306.

United States District Court,

D. South Carolina,

Spartanburg Division.

July 29, 1977.

[657] MEMORANDUM OF DECISION

Durer, District Judge.

This patent-antitrust litigation consisting of thirty-seven

separate actions consolidated for purposes of trial has been

tried to the court without a jury on the liability issues

only, and in this memorandum of decision the court will

record its findings of fact and conclusions of law in com-

pliance with Rule 52(a), F.R.Civ.P. Jurisdiction is based

on 28 U.S.C. §§ 1331, 1332, 1337, 1338, 2201 and 2202.

Memorandum Opinion—444 F, Supp. 648 (D.S.C. 1977)

HISTORY OF THE LITIGATION

The first of the many complaints involved here was filed

in the Spartanburg Division, United States District Court

for the District of South Carolina, on August 8, 1968, as

Case No. 68-705. In this original suit Deering Milliken

Research Corporation (DMRC) and Moulinage et Retor-

derie de Chavanoz (Chavanoz) sought recovery of royal-

ties alleged to be due by Textured Fibres, Inc, as a

sub-licensee of DMRC which in turn was the exclusive use-

licensee in the United States of certain apparatus and

process patents issued to Chavanoz in the United States

and relating to the false twist texturing of synthetie yarns.!

Similar suits were thereafter instituted by DMRC and

Chavanoz against various other textile manufacturers

(Throwsters) engaged in the yarn texturing business.

On November 25, 1969, the Duplan Corporation instituted

in the United States District Court for the Southern Dis-

trict of New York the first of a series of actions by the

Throwsters against DMRC and Chavanoz attacking the

validity of the Chavanoz patents and asserting claims under

the antitrust laws. Joined as defendants with DMRC and

Chavanoz in these Throwster actions were Deering Milliken,

Ine. (DMI), of which DMRC is a corporate subsidiary,

Ateliers Roannais de Constructions Textiles (ARCT—

France), a French manufacturer of textile machinery, and

ARCT, Ine., a corporate subsidiary of ARCT—France or-

ganized under the laws of North Carolina for the purpose

of selling in the United States the textile machinery manu-

factured by ARCT—France and embodying the Chavanoz

patents. These actions by the Throwsters were followed

' For a more detailed explanation of yarn texturing generally and

“false twist texturing” see Appendix A attached hereto.

Memorandum Opinion—444 F’. Supp. 648 (D.S.C. 1977)

by countersuits and counterclaims by DMRC and Chavanoz

for unpaid royalties and patent infringement.

At that time the thirty-seven actions were pending in

the federal courts in South Carolina, North Carolina, Vir-

ginia and New York. After treatment by various United

States District Courts and a Panel on Multi-District Litiga-

tion all of the cases, which by this time involved generally

the same basic issues of unpaid royalties, patent validity

and infringement, patent misuse and alleged antitrust vio-

lations, were consolidated in the District of South Carolina

in 1971 as Civil Action No. 71-306. The thirty-seven actions

are listed in Appendix B attached hereto.2

[658] Assigned originally to the Honorable Donald Rus-

sell, these cases were re-assigned to the Honorable Robert

W. Hemphill of the District of South Carolina upon Judge

Russell’s elevation to a seat on the Court of Appeals for

the Fourth Circuit in 1971 Thereafter Judge Hemphill

assumed charge of the litigation, held numerous hearings,

ruled on innumerable motions involving procedural, evi-

dentiary and summary judgment matters and personally

presided over the taking of a massive volume of deposition

testimony in this country and in France. A summary of

the previously-reported rulings and decisions in the case

is attached as Appendix C.

The prodigious work of Judge Hemphill is summarized

in a footnote to one of his decisions, Duplan Corporation v.

? Several of the parties to these actions have undergone corporate

name changes during the pendency of the litigation, and during the

course of the trial the Duplan Corporation has become involved in

reorganization proceedings under the Bankruptcy Act. An appro-

priate order noting these changes will be entered, but for the sake of

convenience the original names of the parties will be used throughout

this memorandum.

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

Deering Milliken, Inc., 400 F.Supp. 497 at page 502

(D.S.C.1975). That case was concerned with a recusal

motion filed by counsel for DMRC, DMI and Chavanoz

which after characteristically careful and painstaking con-

sideration Judge Hemphill denied. The decision was not

appealed. Because of the press of other duties (see 400

F.Supp. at page 526, Footnote 159) Judge Hemphill there-

atter asked to be relieved from further duties in this litiga-

tion, and the same was assigned to this writer.

Pre-trial conferences were held at Raleigh, North Caro-

lina, on March 26 and June 4, 1976. The Throwsters who

were aligned in interest on one side of the case were

designated as plaintiffs and the parties opposing the

Throwsters, DMRC, DMI, Chavanoz, ARCT-France and

ARCT, Ine., were designated as defendants and will be

so referred to during the course of this memorandum. The

trial which was commenced at Rock Hill, South Carolina,

on June 14, 1976 consumed ninety-one trial days and with

periodic recesses was concluded on February 11, 1977.

THE PARTIES AND THEIR ALIGNMENT

The plaintiffs are companies, or divisions of companies,

whose businesses involve the processing of synthetic fila-

ment yarns in order to make them suitable for a wide

variety of end uses. Each plaintiff is a corporation organ-

ized and existing under the laws of the state indicated

below and conducts its principal texturing activities in the

city indicated:

State of Principal Place

Plaintiff I ncorporation of Business

Blanchard Yarn Delaware Whitakers, N. C.

Company, Inc.

3urlington Industries, Inc. Delaware Greensboro, N. C.

Memorandum Opinion—444 F’, Supp. 648 (D.S.C. 1977)

Plaintiff

Burkyarns, Inc.

Dixie Yarns, Inc.

The Duplan Corporation

Frank Ix & Sons Virginia

Corporation

Hemmerich

Industries, Inc.

Jonathan Logan, Inc.

Lawrence Texturing

Corporation

Leon-Ferenbach, Inc.

Madison Throwing

Company

National Spinning

Company, Inc.

Olympia Industries, Inc.

Reliable Silk Dyeing

Company, Inc.

Schwarzenbach-Huber

Company

Spring-Tex, Inc.

Texelastic Corporation

Texfi Industries, Inc.

United Merchants &

Manufacturers, Inc.

New Jersey

Pennsylvania

Delaware

(Division of

Duplan)

Pennsylvania

( Division of

Burlington)

New York

Delaware

New York

New Jersey

North Carolina

Delaware

State of Principal Place

Incorporation of Business

North Carolina Valdese, N. C.

Tennessee Stanfield, N. C.

Delaware Winston-Salem, N. C.

Charlottesville, Va.

Denver, Pa.

Spartanburg, S. C.

Lillington, N. C.

Johnson City, Tenn.

Madison, N. C.

Washington, N. C.

Tuscaloosa, Ala.

New York, N. Y.

Luray, Va.

Gibsonville, N. C.

High Point, N. C.

Lumberton and

New Bern, N. C.

Cartersville, Ga. and

South Carolina

[659] The defendants opposing the Throwster plaintiffs

are the following parties:

1. DMRC is a South Carolina corporation and is a

wholly-owned subsidiary of DMI. It is the successor to

Deering Millikin Research Trust, and its newly-acquired

corporate name is Milliken Research Corporation. Under

a license agreement with Chavanoz, DMRC is the exclusive

use licensee in the United States and Canada of the right

to use the Chavanoz patents in suit and the right to grant

sublicenses,

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

2. DMI is a Delaware corporation which maintains a

place of business in New York, but its headquarters and

much of its manufacturing operations are maintained in

South Carolina. Its newly-acquired corporate name is

Milliken & Company. DMI is a diversified textile manu-

facturer.

38. Chavanoz is a French “societe anonyme” with its

principal place of business in Chavanoz, France. Chavanoz

is the owner of the eight patents in suit.

4. ARCT-France is a French corporation with its prin-

cipal place of business in Roanne, France. It is a manu-

facturer of various kinds of textile machinery, and un-

der contractual arrangements with Chavanoz, ARCT-

France is the exclusive licensee of the rights to make and

sell the inventions made pursuant to the Chavanoz patents.

0. ARCT, Ine, is a North Carolina corporation with

its principal place of business at Greensboro, North Caro-

lina. It was formed in 1966 by ARCT-France for the pur-

pose of distributing in the United States the textile

machinery manufactured by ARCT-France.

In addition to the named defendants herein, other persons

and concerns are alleged to have conspired with the de-

fendauts in one or more of the antitrust offenses charged,

including: Leesona Corporation (formerly known as Uni-

versal Winding Company) (“Leesona”), the Permatwist

Company (“Permatwist”), a partnership whose members

are Warren A. Seem, Nicholas J. Stoddard, Fred Teece and

Harold P. Berger, and Whitin Machine Works (“Whitin”).

a. Leesona is a Massachusetts corporation with its prin-

cipal place of business in Warwick, Rhode Island. Leesona

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

is a manufacturer and seller of false twist and other textile

machinery and has licensed patents and technology relat-

ing to false twist and post-treating.

b. Permatwist is a Pennsylvania partnership which has

been engaged in the promotion and licensing of apparatus

and processes relating to false twist and post-treating.

c. Whitin was a Massachusetts corporation engaged in

the manufacture and sale of textile machinery with its

principal place of business in Whitinsville, Massachusetts.

Prior to 1966, Whitin purchased ARCT false twist machines

from ARCT-France and was the exclusive distributor of

such machines in the United States.

The acts alleged to have been done by the corporate

defendants and their alleged co-conspirators have been car-

ried out by their officers, directors or employees, including

but not limited to, the following:

a. Norman C. Armitage was an officer of DMRC and

from time to time an officer of DMI. Dr. Armitage, who

was a lawyer, was in charge of the business, legal, policy

and administrative aspects of DMRC’s false twist licensing

program from its inception until his death in 1972.

b. Leo M. Soep was a French “conseil en brevets” em-

ployed until about 1966 by Comptoir des Textiles Artificiels,

an affiliate of Chavanoz. Soep represented Chavanoz in

connection with its false twist activities. After 1966 he

became an independent conseil en brevets but continued to

perform services for Chavanoz. From time to time Soep

represented ARCT-France in connection [660] with its false

twist activities. From 1966 until his death in 1971, Soep

owned five per cent of the issued and outstanding shares

of ARCT, Inc., and was a member of its board of directors.

Memorandum Opinion—444 FP’. Supp. 648 (D.S.C. 1977)

e. Henri Crouzet was at all relevant times the president

of ARCT-France, and also, from the time of its formation

in 1966, the president and member of the board of directors

vf ARCT, Ine.

d. Yves de Monecuit was at all relevant times an officer

of Chavanoz and the Chavanoz employee who worked with

Leo Soep on false twist matters. In 1969 or 1970 he be-

came president of Chavanoz.

e. Robert F. Waters handled all ARCT false twist ma-

chinery sales for Whitin from 1959, when the first ARCT

false twist machines were introduced in the United States,

through 1965. Since the formation of ARCT, Ine. in 1966,

Waters has been its executive vice president in actual

control of its day-to-day operations, a member of its board

of directors, a shareholder, and has continued to be the

prime salesman for ARCT false twist machinery in the

United States.

f. Walter E. Mueller was chief house patent counsel for

DMRC (and its predecessor Deering Milliken Research

Trust) from April, 1951 to March 1, 1968.

g¢. Robert Leeson, at all relevant times until 1967, was

the president and chief executive officer of Leesona. Mr.

Leeson was also chairman of the board of Leesona from

1956 or 1957 until at least February, 1972.

h. Albert P. Davis was at all relevant times the house

patent counsel for Leesona.

THE PLEADINGS

At one time there were twenty-two Chavanoz patents in

suit. Prior to trial twelve of the patents had been held not

infringed on motions for summary judgment, and two

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

of the patents had been held invalid under 32 U.S.C.

§ 102(d). Eight patents remain in suit. They are United

States Patents Nos.

2,891,375 3.165,881

2,944,319 3,232,037

3,012,397 3,283,414

3,123,973 3,084,450

Plaintiffs allege in complaints, counterclaims and affirma-

tive defenses against DMRC and Chavanoz that these re-

maining Chavanoz patents are invalid and not infringed.

They seek declaratory judgments of invalidity and non-

infringement. They deny any liability for royalties or for

patent infringement. They also allege that DMRC, DMI,

Chavanoz, ARCT-France and ARCT, Ine., have violated

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

and have committed acts of patent misuse.

The antitrust claims fall into two categories: (a) the

claim of a vertical conspiracy between the named defen-

dants arising out of the license and sub-license agreements

and the manner in which the business of the defendants

was conducted, and (b) a claim of horizontal conspiracy

between the named defendants and Leesona arising out of

agreements entered into in 1964 which settled certain

patent litigation then pending between Leesona and the

defendants. The misuse claims relate to proceedings before

the Patent Office, license provisions and the conduct of the

present litigation by the defendants.

As previously indicated, the first of the actions here

involved was brought by DMRC against Textured Fibres,

Ine. (now Texfi Industries, Ine.) on August 8, 1968, as

a simple contract action for the recovery of alleged unpaid

royalties in the amount of $45,691.45. Following the in-

A10

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

stitution of the suit by Duplan Corporation on November

25, 1969, seeking a declaratory judgment of invalidity and

non-infringement as to the Chavanoz patents and alleging

antitrust violations and patent misuse DMRC asserted

claims or counterclaims against each of the plaintiffs for

breach of the sub-license agreements arising out of plain-

tiffs’ refusal to pay royalties and infringement of the

Chavanoz patents arising out of the plaintiffs’ continued

use of the ARCT machines embodying the Chavanoz patents

following repudiation or termination by the plaintiffs of

the sub-license agreements. Chavanoz, which is not a party

to the sub-license agreements, has joined DMRC in assert-

ing [661] claims of patent infringement and, of course, is

defending against plaintiffs’ claims of antitrust violations

and patent misuse.

ARCT-France, ARCT, Ine., and DMI disclaim any in-

terest in or to the patents in issue and therefore make no

claims for infringement damages or royalties against the

plaintiffs. In their answers these three defendants have

denied any liability to the plaintiffs by reason of the alleged

antitrust violations.

THE ISSUES

All questions of damages, if any, to which any party

may be found entitled having been reserved for trial at a

later time, the issues arising on the pleadings to be resolved

by the court at this time fall into four categories:

I. ANTITRUST

II. PATENT MISUSE

Ii]. PATENT VALIDITY AND INFRINGEMENT

IV. NONPAYMENT OF ROYALTIES

All

Memorandum Opinion—444 F’. Supp. 648 (D.S.C. 1977)

These issues will be treated in the succeeding sections of

the memoraadum.

THE ANTITRUST ISSUES

A. The Vertical Conspiracy.

The facts on which the plaintiffs’ allegations of antitrust

conspiracy between the parties defendant in the chain of

distribution are based are not in substantial dispute, the

plaintiffs contending that the alleged restraints of a ver-

tical nature are set forth in writing in the instruments the

defendants signed. A review of the essential provisions of

these agreements is therefore in order.

1. The Chavanoz-ARCT Agreements.

On October 30, 1954, Chavanoz entered into an agreement

with ARCT-France (The “1954 Agreement”) under the

terms of which Chavanoz granted to ARCT-France “the

exclusive right to manufacture and sell” the inventions de-

scribed in certain Chavanoz false twist patents and patent

applications as well as any later improvements. At that

time Chavanoz owned French Patent No. 1,054,338 and

two applications (Nos. 52,346 and 54,253) for certificates

of addition, but it owned no United States patents relating

to false twist.

The pertinent provisions of the 1954 agreement were as

follows:

“1, [Chavanoz] grants to ARCT the exclusive

right to manufacture and sell the devices described

in the patent and additions mentioned above as well

as any later improvement.

A12

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

“4... . [T]he rights of industrial property are

reserved exclusively for [Chavanoz] including those

attached to the new models. Any application for a

patent that could concern such new models must be

made by [Chavanoz] in its name and at its expense.

ARCT will take the necessary steps to inform [Cha-

vanoz] promptly of any improvements so as to allow

it to insure adequate protection of which [Chavanoz]

is the sole judge.

“6. ARCT shall not deliver the patented material

to any firms other than licensees of the HELANCA

process, except in the case of a prior and written

authorization from [Chavanoz].’

“7. In exchange for the present exclusive grant,

ARCT shall pay to [Chavanoz] royalties on all the

material built and invoiced by ARCT or by its sub-

licensees [662] by virtue of the present document,

delivered to any firms others than [Chavanoz]. The

royalties shall be as follows . . . [ten per cent for

first year decreasing annually to two per cent for

the sixth and following years].

“9, The present license for construction and sale

is granted and accepted for the duration of the main

_? Paragraph 6 of the 1954 agreement prohibiting ARCT from de-

livering its machines to firms other than the licensees of the “HEL-

ANCA" process was included by Chavanoz to carry out its contractual

commitment to a Swiss company, Heberlein, reading as follows:

“Chavanoz undertakes for ARCT to deliver its machines

only to firms which sign the licenses mentioned in Articles 1

and 2 with Heberlein, regardless of the fact of whether the

Chavanoz patents constituting the subject of the present con-

tract exist or do not exist in the countries concerned.”

Under a 1958 modification to the 1954 agreement ARCT-France

was relieved from the provisions of paragraph 6 as to certain countries,

not including the United States, and under certain conditions.

A13

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

patent [French Patent No. 1,054,338], and it shall

come into effect on the day the first mass-produced

machine following the prototype is delivered.”

Thereafter Chavanoz obtained United States patents cor-

responding to the French patent and applications which

were issued as United States Patents Nos. 2,741,893 (the

“bathtub” patent—so called because of the similarity in

shape of the vessel designed to contain a hot liquid through

which the yarn passed during processing to a conventional

bathtub); 2,761,272; 2,780,047; 2,823,513; and 2,823,014.

Since the 1954 agreement covered “improvements” as well

as the existing French patent and applications and was

worldwide in scope, these and subsequent United States

patents obtained by Chavanoz relating to false twist came

under the 1954 agreement. All five of these patents were

held by Judge Hemphill on motions for summary judgment

to be non-infringed by any ARCT machine purchased by

the plaintiffs in this action.

Chavanoz and ARCT-France entered into a revised

agreement dated July 18, 1962 (The “1962 Agreement”)

which consolidated “in a comprehensive instrument” the

1954 agreement and a “number of verbal agreements” stat-

ing “the parties are at one in considering that the various

agreements should be brought into line and consolidated

in a comprehensive instrument.” The essential provisions

of the 1962 agreement were as follows:

“1, [Chavanoz] grants to [ARCT] the exclusive

right of construction and sale in the whole world

of the devices described in the patents and patents of

addition listed on the attached List A, as well as of

any subsequent improvement in the field of the manu-

facture of crimped textile yarns, either natural, arti-

Al4

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

ficial or synthetic, curled through the application of

a false twist which is heat set, and in the yarns which

may be obtained from said crimped or curled yarns,

through an additional treatment or shaping. This

field is called the ‘field of the patents’.

“4. All patent rights attached to the improvements

in the field of the patents remain the property of

{Chavanoz]. Any patent application which may con-

cern new models must be filed by [Chavanoz] in his

name and at his expense, and [ARCT] must take all

necessary measures so as to diligently communicate

the improvements to [Chavanoz] to enable him to

assure adequate protection, of which [Chavanoz] re-

mains the only judge.

“ur

7. [ARCT] has filed in its name the patents

listed on List B and the patents have been assigned

to [Chavanoz] with a retrocession of the complete

freedom of exploitation outside of the field of the

patents...

“8, [ARCT] shall deliver the devices under the

present contract only to the holders of a process li-

cense which is granted by [Chavanoz], except in the

ease of a prior and written authorization by [Chav-

anoz]. In the countries where [Chavanoz] has no

patents, [ARCT] may deliver without authorization.

“9. [ARCT] pays to [Chavanoz] in exchange for

the exclusive right of construction and sale accord-

ing to Article 1 and the technical assistance accord-

ing to Article 2 [‘the drawings and models of the

prototypes made by the patentee’], a royalty which

is two per cent of the value before taxes, leaving

factory, electric motors not included.

“11. The present license of construction and sale is

granted and accepted for the duration of the French

Al5

Memorandum Opinion—444 F’. Supp. 648 (D.S.C. 1977)

Patent No. 1,054,338 [U.S. Patent No. 2,741,893—

the “bathtub” patent].

“19, By reason of the technical assistance supplied

by [Chavanoz] according to Articles 1 and 2, the

present contract is not cancelled in the ease of the

complete invalidity of the patents of List A, but in

[663] this case the protection according to Article 15

is de facto eliminated.”

An additional French patent of addition (No. 67151)

issued subsequent to the 1954 agreement was listed in List

A attached to the 1962 agreement, but apparently no United

States patent was issued corresponding to it. Of the six

French patents assigned by ARCT to Chavanoz as shown

on List B, United States patents were obtained on two

of them (French Patent Nos. 1,126,065 and 1,216,847) and

these two United States Patent Nos. 2,788,634 and 3,177,361,

were held by Judge Hemphill not to have been infringed by

the plaintiffs herein.

The royalties payable by ARCT to Chavanoz under the

1954 and 1962 agreements were in fact paid, and there

was no difference in the royalty rate for machines sold

in the United States where customers also paid a produc-

tion royalty for use of the machines and the royalty rate

paid on machines sold in countries where no use royalty

was payable.

2. The Chavanoz-DMRC Agreements.

On December 31, 1957, DMRC and Chavanoz signed an

agreemnt giving DMRC the exclusive rights in the United

States and Canada under the Chavanoz false twist patents

with the right to grant sub-licenses. The pertinent portions

of this agreement were as follows:

A16

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

“1. Chavanoz hereby grants to DMRC throughout

the United States, its territories and dependencies

and Canada upon the conditions hereinafter set forth

and subject to certain rights of cancellation as de-

fined below, an exclusive license to use the FT process

and FT machines for the purpose of making, using

and selling [false twist] yarns in accordance with

technical information and the inventions of the FT

patents set forth in Appendix ‘A’ appended hereto,

with the right to grant sublicenses in the United

States and Canada. The right to manufacture and

sell FT machines in accordance with said F'T patents

is specifically excepted.

“3 The manufacture and delivery of FT machines

by ARCT or its sublicensees for use in the United

States and Canada shall, as between Chavanoz and

DMRC, be the responsibility of Chavanoz and Chav-

anoz shall direct ARCT or ARCT’s sublicensees for

the manufacture and sale of FT machines to sell or

deliver FT machines in the United States and Canada

only to parties sublicensed by DMRC to use the

machines, such sublicenses and parties being respec-

tively referred to hereinafter as ‘use licenses’ and

‘use licensees’...

“DMRC under its rights to sublicense hereunder

shall issue use licenses to reputable customers of

ARCT or of ARCT’s sublicensees when called upon

by ARCT or ARCT’s sublicensees so to do, but shall

have the right to refuse the grant of a use license

to any parties for sufficient cause. The grant of a

use license shall not be arbitrarily or unreasonably

withheld.

“9. DMRC shall charge its use licensees royalties

in the amount of five per cent of the manufacturer’s

list price of the raw yarn which is converted to

Al7

Memorandum Opinion—444 F’. Supp. 648 (D.S.C. 1977)

mousse [false twist] yarns by such use licensees

according to the FT process or on FT machines

and is sold or used; provided, however, that this

rate of royalty may be reduced by DMRC and at its

discretion to a figure of not less than two and one-half

per cent if there is substantial unlicensed competition

by producers using the FT process or FT machines

embodying the inventions of this agreement to the

extent of at least 10,000 pounds of [false twist] yarn

per month and further provided, that DMREC shall

exact from each use licensee a minimum annual roy-

alty of $1,000.00 payable in advance.

“10. DMRC shall remit to Chavanoz fifty per cent

of all revenues which DMRC itself receives from the

use licensees...

“15, This agreement and the license granted here-

under, unless sooner terminated or cancelled as here-

inafter provided, shall continue for a period until

expiration of the last patent to issue to Chavanoz

[664] in the United States and Canada respectively.”

In addition to the quoted provisions the agreement also

required Chavanoz “to furnish to DMRC all the technical

information and know-how Chavanoz possesses in the field

of the FT process”, and there was a grant-back provision

requiring DMRC to assign to Chavanoz improvements in

the FT process made by DMRC and to include in its sub-

license agreements a provision requiring its sub-licensees

to grant Chavanoz a license in the sub-licensees’ own coun-

try under any such improvements and to assign all foreign

rights to Chavanoz without payment of royalty.

DMRC and Chavanoz executed six supplemental agree-

ments between 1957 and 1962 under the terms of which

Mexico was added to the territory in which DMRC was

A18

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

given use rights, the grant-back provision in the 1957 agree-

ment was first modified and then deleted, the royalty rate

was fixed at two and one-half per cent and DMRC was

authorized to grant non-commercial use licenses with no

minimum royalty. A further supplemental agreement pro-

vided that the sub-licenses granted by DMRC would not

ipso facto terminate “if for any reason the exclusive license

granted DMRC by Chavanoz is terminated.”

On December 28, 1962, DMRC and Chavanoz entered

into a new basic agreement which revised the 1957 agree-

ment, but in all material respects it remained the same as

the 1957 agreement as modified by the intervening supple-

menial agreements.

With a few subsequent modifications, the 1962 DMRC-

Chavanoz agreement remained the basic agreement between

them until after the commencement of the present litigation.

One of the modifications incorporated the terms of an agree-

ment between DMRC, Chavanoz and Whitin in June, 1963

increasing the royalty rate to three and one-half per cent

with all but .6% being escrowed for return to the licensees

in the event of the unsuccessful defense of litigation then

pending between the Leesona Corporation, DMRC, Chava-

noz and Whitin.

3. The ARCT-France-Whitin Agreement.

On February 20, 1959, ARCT-France and Whitin Machine

Works entered into an agreement under which Whitin was

granted the exclusive right to sell ARCT false twist ma-

chines in the United States, Canada and Mexico. (An option

granted Whitin to manufacture the machines was never ex-

ercised.) Following several recitals including reference to

the 1954 agreement between Chavanoz and ARCT-France

A19

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

and the fact that Chavanoz has granted to DMRC “the ex-

clusive right to grant sub-licenses to practice and use the

processes covered by said {Chavanoz] patents in the USA,

Canada and Mexico” the agreement contained the provision

that “Whitin agrees to sell FT machines only to persons or

firms approved by [Chavanoz] and/or DMRC.”

While the agreement speaks in terms of Whitin’s acting

“as a selling agent for such machines”, in practice Whitin

purchased the machines outright from ARCT-France and

took title to them at the French port of embarkation. At

that time ARCT-France parted with all dominion and con-

trol over the machines and the risk of loss was transferred

to Whitin. Whitin had the absolute right to set its own price

for the resale of these machines to Throwsters in the United

States, Canada and Mexico.

4. The ARCT-France-ARCT, Inc., Agreement.

In February, 1966, ARCT, Ine., was organized as a North

Carolina corporation to undertake to sell the ARCT ma-

chines in the United States. Stock in this new corporation

was owned sixty per cent by ARCT-France, thirty-five per

cent by Robert Waters, who had been Whitin’s sales mana-

ger for the ARCT machines, and five per cent by Leo Soep,

a French “conseil en brevets” 4, who, in addition to repre-

senting [665] Chavanoz in patent matters, also negotiated

agreements in patent and other matters on behalf of ARCT-

France from time to time including the Whitin agreement.

4 As stated by Judge Widener in Duplan Corporation v. Deering

Milliken. Inc., 540 F.2d 1215, 1218, Footnote 3 (4th Cir. 1976), “The

American legal system apparently has no direct equivalent to the

French conseil en brevets. For our purposes, however, it is sufficient

to note that Soep was not a lawyer, but, at all times relevant here,

represented Chavanoz in patent matters.”

A20

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

With the formation of ARCT, Inc., Robert Waters left

Whitin, where he had been responsible for sale of all ARCT

false twist machines in this country, to become executive vice

president and director of ARCT, Inc., in actual control of its

day-to-day operations.

On February 7, 1966, ARCT France and ARCT, Inc., en-

tered into an agreement for the purchase of ARCT machines

from ARCT-France by ARCT, Ine. This agreement pro-

vided that “property in the machine and risk of loss will

shift to ARCT, Inc., upon delivery to the ocean carrier at

the French port of embarkation” and that ARCT, Inc., had

the absolute right to set its own resale price to its Throwster

customers. Although Whitin retained the right to distribute

the machines after the formation of ARCT, Inc., it in fact

went out of that business and did not sell any false twist

machines thereafter, and since 1966 ARCT, Inc., has acted

as the distributor of ARCT false twist machines in the

United States.

The written agreement between ARCT-France and

ARCT, Inc., contained no express covenant, such as that

found in the ARCT-France-Whitin agreement, restricting

the resale of ARCT machines by ARCT, Inc., to DMRC

licensees, but in practice ARCT, Inc., did in fact so restrict

delivery of the machines until well after the institution of

this litigation.

The sales contracts of ARCT, Inc., and its predecessor,

Whitin, contained no reference to the DMRC use license

or the fact that DMRC had any use rights in the Chavanoz

patents, but the Throwster purchasers were routinely in-

formed by Waters while he was employed by Whitin and

later by ARCT, Inc., that it would be necessary to obtain a

use license from DMRC before the machinery could be

placed in operation. It was also publicly announced in trade

A21

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

publications as early as April, 1959, that Chavanoz had

granted DMRC the right to license users of the ARCT

machines in the United States which Whitin had been li-

censed to manufacture and sell, and it was common knowl-

edge in the trade that a DMRC use license was required

to operate these machines.

5. The Standard DMRC License Agreement.

Prior to the sale of the first ARCT machine in the United

States DMRC prepared with Chavanoz’s approval a printed

form standard license agreement (the “DMRC Use Li-

cense”) to be signed by all purchasers of ARCT machines.

The subject matter of the DMRC use license, which was

signed by each of the plaintiffs in substantially identical

form, is spelled out in the “Whereas” clauses as follows:

“Wuereas, DMRC has an exclusive license through-

out the United States, Canada and Mexico with the

right to a grant sublicenses under certain inventions

and technical information relating to processes and

devices for the manufacture of crimped synthetic

yarns based upon the application of a false twist

(such processes and devices being hereinafter re-

ferred to respectively as ‘FT processes’ and ‘F'T ma-

chines’), which inventions are described in United

States patents and/or applications for Letters Patent

in the United States, owned by MOULINAGE ET

RETORDERIE DE CHAVANOZ (hereinafter re-

ferred to as CHAVANOZ) and listed in Appendix

‘A’ appended hereto, together with certain improve-

ments thereon as such may hereafter be made or

acquired by CHAVANOZ and any patent applica-

tions and/or patents in the United States relating

thereto, to use said processes and devices for the

purpose of making said crimped yarns for use and

A22

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

sale, such right of DMRC under the inventions, appli-

cations and patents aforesaid being hereinafter re-

ferred to as ‘FT PATENT RIGHTS,’ and

[666] “Wuereas, Licensee desires a use license to

use processes and devices embodying the inventions

of said FT PATENT RIGHTS, .. .”

The pertinent contractual provisions of the agreement are

as follows:

“1. DMRC hereby grants to LICENSEE upon the

conditions hereinafter set forth and subject to certain

rights of cancellation as defined below, a nonexclu-

sive and nontransferable use license for a period until

expiration of the last patent to issue in the United

States, upon which said FT PATENT RIGHTS are

based, to use the FT processes and FT machines for

the purpose of making for use and sale crimped yarns

in accordance with technical information and the in-

ventions of said FT PATENT RIGHTS. The use

license hereby granted is restricted as to the use of

the FT process and FT machines to the plants of the

LICENSEE situated in the United States, but sub-

ject to intervening rights, if any, of third parties, the

crimped yarn manufactured by such use may, as be-

tween DMRC and LICENSEE, be sold freely in all

of the countries of the world.

“2. DMRC has already furnished to LICENSEE

certain technical information relative to the present

inventions, which LICENSEE acknowledges, and as

promptly as practicable after the date of this agree-

ment DMRC shall furnish to LICENSEE such addi-

tional technical information and ‘know-how’ as is

necessary in DMRC’s opinion to enable LICENSEE

to practice the inventions licensed hereby and shall

A23

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

from time to time while this agreement is in effect

furnish further additional information as it similarly

deems necessary to supplement information hereto-

fore furnished hereunder, provided, however, there

shall be no obligation on the part of DMRC or its

licensor to perform any additional or future research

or development in the field of the inventions covered

by this agreement. DMRC shall disclose to LICEN-

SEE said additional information and ‘know-how’

after mill test has in DMRC’s judgment confirmed

that an improvement has been made and within sixty

(60) days after the improvement has in DMRC’s

judgment been successfully reduced to practice in

commercial production. If DMRC hereafter makes

or acquires any improvements of the inventions of

FT PATENT RIGHTS upon which it obtains pat-

ents, it shall then grant to LICENSEE licenses to

use such improvements at no increase in royalty by

incorporation of such patents into FT PATENT

RIGHTS under the present agreement. LICENSEE

shall be entitled to send its engineers or other per-

sonnel to DMRC or its designee for the purpose of

obtaining instructions as to the best methods of prac-

ticing these inventions, and may request DMRC to

send to LICENSEE upon terms to be mutually

agreed upon technical personnel for the purpose of

instructing LICENSEE at LICENSEE’s premises in

the said best methods of practicing the inventions.

“2 LICENSEE shall disclose to DMRC within

thirty (30) days of the first use or embodiment there-

of in commercial practice, any improvements of the

FT process or # {' machines, whether or not patent-

able, conceived and made by LICENSEE or its em-

ployees subsequent to the date of this agreement and

shall grant to DMRC or its designee throughout the

A24

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

United States, its territories and dependencies, a non-

exclusive license thereunder and any patent applica-

tion or patent thereon with the exclusive right in

DMRC or its designee to sublicense its licensees and

sublicensees thereunder for the life of the last patent

to issue in the United States of the patents upon

which said FT PATENT RIGHTS are based, said

improvements being available for use by LICEN-

SEE, and LICENSEE shall assign to DMRC or its

designee all foreign rights thereto, all without pay-

ment of royalties. [This grantback clause deleted

after 1961. ]

“4. Except as hereinafter provided, LICENSEE

shall pay DMRC during the life of this agreement

royalties in the amount of two and one-half per cent

(212%) [later 344%] of the manufacturer’s list [667]

price of the raw yarn (but including any customs

‘tariff on yarn imported from abroad) which is con-

verted to crimped yarn by LICENSEE according to

the FT process or on FT machines and is sold. . .

The present use license is related only to the use of

FT machines manufactured under license of CHAV A-

NOZ by Ateliers Roannais de Constructions Textiles,

of Roanne, France, referred to hereinafter as

(‘ARCT,’ or its sublicensees, and LICENSEE is

required to pay royalties under the provisions of the

present paragraph only upon the production of such

machines, provided that LICENSEE shall have the

right to include under this use license the use of any

other false twist or FT process or any other false

twist or FT machine upon notice to DMRC, where-

upon royaities upon the production thereof. shall

thereafter be payable in accordance with the above

provisions.

A25

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

“5. LICENSEE shall pay to DMRC a minimum

annual royalty of One Thousand Dollars ($1,000.00)

in United States currency, the first said payment to be

made upon the signing of this agreement by LICEN-

SEE and succeeding payments upon each anniver-

sary of the execution of the agreement. These mini-

mum royalties in their entirety shall be respectively

credited against royalties accruing under paragraph

4 hereof in the next succeeding twelve (12) months

but shall not be credited against any royalties payable

thereafter.

“9. DMRC warrants that CHAVANOZ has under-

taken that, in the event that LICENSEE is threat-

ened with suit or is used for patent infringement

based upon the use of techniques or procedures speci-

fieally recommended by DMRC to LICENSEE here-

under, CHAVANOZ shall upon request from LICEN-

SEE (transmitted through DMRC) defend such suit

at the expense of CHAVANOZ insofar as such al-

leged patent infringing activities may be involved;

provided that DMRC is notified promptly in writing

of all such claims of or suits for infringement, and

further provided that any damages awarded or ex-

penses of any kind incurred in such defense beyond

court costs and attorneys’ fees shall be borne by

LICENSEE.

“10. DMRC further warrants that CHAVANOZ

has agreed that, if for any reason the exclusive license

granted DMRC by CHAVANOZ and referred to

above is terminated, the present use license shall not

be terminated ipso facto but LICENSEE shall have

the right and option to continue under the terms of

the present use license, except that CHAVANOZ shall

sueceed to the rights and obligations of DMRC here-

under.

A26

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

“11. LICENSEE shall have the right to terminate

this license and agreement five (5) years after the

date of commencement of the first fiscal year here-

under or on any anniversary thereafter by giving

DMREC sixty (60) days’ notice in writing of such

termination...

“13. In the event of termination or cancellation

of this agreement by operation of paragraphs 10, 11

or 12 hereof, LICENSEE agrees to cease using the

FT process and FT machines for the manufacture of

crimped yarn according to inventions which are the

subject of the present agreement, except that LICEN-

SEE shall have the right to complete any and all con-

tracts for the manufacture of said crimped yarn

which it may then have upon its books or for which

it has become obligated ... In the event of termina-

tion or cancellation of this agreement, LICENSEE

shall not use or disclose the technical information

furnished hereunder except as such information is

published or otherwise made available to the public

through other sources, and LICENSEE shall deliver

to DMRC within ninety (90) days after the date of

such termination or cancellation all written or

printed material in LICENSEE’s possession relating

to the FT process or FT machines of this agreement,

whether or not such written or printed material was

furnished to LICENSEE by DMRC, and ineluding

all copies of instructions, drawings, photographs, and

the like.

[668] “14. LICENSEE acknowledges the validity

of any patents issued or which may issue on applica-

tions as aforesaid, and agrees that it will not contest

the same or be a party directly or indirectly to any

proceeding disputing such validity or tending to im-

pair the value of FT PATENT RIGHTS or by which

A27

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

the enjoyment of full revenue therefrom by DMRC

may be reduced.

From the outset of the DMRC licensing program in the

United States DMRC and Whitin actively cooperated in

compelling compliance with the use license requirement, and

this cooperation was continued by ARCT, Inc., when it took

over the sales of the ARCT machines in this country.

DMRC took such measures as threatening to embargo the

shipment of ARCT machines to the United States in an

effort to prevent the delivery of machines to non-licensed

Throwsters.

The procedures which had been established during the

Whitin period continued essentially unchanged by ARCT,

Inec., until after the commencement of this litigation. AL

though there were some isolated instances in which machines

were delivered prior to the execution by the purchaser of

the use license, Waters never told a customer or prospective

customer that it was not necessary to sign the DMRC license

or that he would deliver a machine if the agreement was not

signed.

ARCT-France through its chief executive officer, Henri

Crouzet, also continued to cooperate with Chavanoz and

DMRC in the use licensing program. As late as February,

1970, Crouzet wired Armitage of DMRC:

“« | . It has never been in our intention nor Bob

Waters’ to deliver machines to your customers with-

out signature of a license ... The agreement given

to Bob Waters is to sell at the present conditions up to

end of February to the new customers who would

have taken towards ARCT the binding of signing a

license with you ... The license will always been

[sic] regularized before delivery of the machines .. .”

(PX 539).

A28

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

And in March of 1970 Crouzet wrote to deMoncuit of

Chavanoz:

“Pursuant to Article 8 of the agreement of 7/18/62

we refrained from and prohibited our affiliate, ARCT,

Inc., from selling false twist machines to American

customers who have not taken a license with DMRC.”

(PX 212)

The result of this concert of action between the defendants

was that at the time of the institution of this litigation there

was no ARCT FT machine in commercial operation in the

United States by an unlicensed user.

Because the requirement that the machines be sold only

to use licensees was a disadvantage to Whitin and ARCT,

Ine. in making sales, the cooperation of Robert Waters in

the DMRC licensing program while he was sales manager

for Whitin and later when he became executive vice presi-

dent of ARCT, Ine. was tinged with some reluctance. As

shown in more detail in the proposed findings of fact of

ARCT, Ine., Nos. 51-52 adopted below, this eventuaily led

to a deterioration of the relationship between Waters, whose

sole interest was in selling machines, and Norman Armitage

of DMRC, whose sole interest was in licensing the machines

and collecting royalties. Finally in late August, 1970, long

after this litigation had been pending, ARCT, Ine., added

a disclaimer paragraph to its sales contracts reading as

follows:

“There is no warranty, express or implied, that the

sale, delivery or use of the FT machine provided for

in this contract does not infringe patents owned by

third parties. A use license under certain patents

covering this machine may be obtained from Deering

Milliken Research Corporation.” (DX 821).

A29

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

Thereafter ARCT, Inc., sold the machines without regard

to whether the customer had signed a use license, and no

new purchaser has since signed a DMRC use license.

In addition to the foregoing findings of fact with respect

to the alleged vertical conspiracy the court expressly adopts

as its [669] own the following proposed findings of fact

submitted by the parties:

1. Plaintiffs’ proposed findings of fact on the antitrust

issues Nos. 14.40, 14.43, 14.46, 14.51, 14.56, 14.59, 14.60, 14.61,

14.64, 14.66, 14.80, 14.81 and 14.82.

2. Chavanoz, DMRC and DMI proposed findings of fact

on the antitrust issues under Section I, Nos. 1-9 inclusive,

11, 12, 20-23 inclusive, 29, 33, 72 and 73.

3. ARCT-France’s proposed findings of fact Nos. 7-12

inclusive, 16, 17, 24, 25, 27 and 30-33 inclusive.

4. ARCT, Ine.’s proposed findings of fact Nos. 50, 51

(with the exception of the last paragraph) and 92.

While the foregoing facts relating to the alle sed vertical

conspiracy are not in serious dispute, the legal conclusions

drawn by the opposing parties from these facts are in dia-

metric contradiction. The plaintiffs have confidently as-

serted that they have established by a preponderance of

the evidence per se and other violations of Section 1 of the

Sherman Act while the defendants with equal confidence

have contended to the contrary, asserting that the facts

establish only that the defendants have exercised lawful

rights granted them under the patent laws.°

5 Section 1 of the Sherman Act (15 U.S.C. § 1) provides in per-

tinent part:

“Every contract, combination in the form of trust or other-

wise, or conspiracy, in restraint of trade or commerce among

the several States, or with foreign nations, is declared to be

illegal...” ;

(footnote continued on following page)

A30

Memorandum Opitton—444 F. Supp. 648 (D.S.C. 1977)

Plaintiffs’ position may be brifly summarized as follows:

(1) Chavanoz’s license to ARCT-France and its sale of

the machines exhausted the patent monopoly and gave all

subsequent purchasers of the machines an implied license

to use them without further payment of royalties;

(2) The Chavanoz-ARCT-France agreements required

ARCT-France to asign to Chavanoz (“grant-back”) patent

rights in all improvements ;

(3) Chavanoz and DMRC conspired to fix the price of the

ARCT machines through the use of royalties exacted from

the Throwster purchasers; and

(4) Chavanoz and DMRC conspired to tie the purchase of

the machines to the purchase of a compulsory package li-

cense covering unpatented “technical information” and tech-

nology and a large number of patents most of which were

not applicable to the machines.

These charges will now be considered seriatim.

The Exhaustion-Implied License Theory

Plaintiffs do not deny that the rights inuring to a patentee

under Section 154 of the patent laws, 35 U.S.C. § 154, to

exclude others from making, using or selling a patented in-

vention may lawfully be assigned or licensed separately

under Section 261, 35 U.S.C. § 261, and that the patentee is

entitled to a monetary reward for any one or all three of

(footnote continued from preceding page)

Section 2 of the Sherman Act (15 U.S.C. §2) makes liable:

“Every person who shall monopolize, or attempt to monopo-

lize, 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... .”

A31

Memorandum Opinion—444 F.. Supp. 648 (D.S.C. 1977)

such rights. Plaintiffs earnestly contend, however, that

Chavanoz failed to achieve its apparent purpose in this

case with the result that the sale of the ARCT machines,

first to Whitin and later to ARCT, Inc., exhausted the patent

monopoly and that upon resale of the machines the pur-

chasers acquired an implied right to use them without pay-

ment of a use royalty to Chavanoz or its sublicensee, DMRC.

From this premise it is argued that the restriction on the

resale of the machines to DMRC licensees was a restraint

on trade which constituted a per se violation of Section 1

of the Sherman Act under United States v. Arnold, Schwinn

and Company, 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249

(1967).

In support of their argument that the exhaustion doctrine

is applicab.e here plaintiffs [670] point to the absence of

any express reservation of use rights in the 1954 agreement.

This agreement gave ARCT-France, so the argument goes,

the unlimited right to sell the machines free and clear of

any use rights later claimed by Chavanoz to have been

retained, and notwithstanding all purchasers of the ma-

chines in the United States fully understood that use royal-

ties were payable, and were in fact paid prior to the institu-

tion of this litigation, the purchasers were under no legal

obligation to do so. Settled principles of contract and patent

law impel a contrary conclusion.

The general rules of construction for contracts are ap-

plicable to the construction of patent licenses. De Stubner

v. United Carbon Company, 67 F.Supp. 884, 891 (S.D.W.Va.

1946), aff'd, 163 F.2d 735 (4th Cir. 1947); Baldwin Rubber

Company v. Paine € Williams Company, 107 F.2d 350 (6th

Cir. 1939). The construction placed on a license contract by

the parties is entitled to great weight. Limbershaft Sales

Corporation v. A. G. Spalding @ Brothers, 111 F.2d 675 (2nd

A32

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

Cir. 1940). And, of course, a license contract must be con-

strued as a whole and the intention of the parties must be

determined from the entire agreement. Victory Bottle

Capping Machine Company v. O. € J. Machinery Company,

280 F. 753, 759 (1st Cir. 1922).

None of the agreements between Chavanoz and. ARCT-

France expressly reserved to Chavanoz the use rights in

machines to be built embodying the Chavanoz inventions,

and sales were only limited by the 1954 agreement to licen-

sees of the HELANCA process. Nothing was said of the

right of those licensees to use the machines following pur-

chase. The 1957 Chavanoz-DMRC agreement, however, ob-

ligated Chavanoz “to direct ARCT . .. to sell or deliver FT

machines in the United States... only to parties sublicensed

by DMRC to use the machines...”

The record is not clear as to how Chavanoz undertook to

discharge this obligation, but without question ARCT-

France and its affiliates in the United States, first Whitin and

later ARCT, Inc., faithfully adhered to the directive which

Chavanoz doubtless gave, and no sales or deliveries were

made to purchasers in the United States who did not at the

time of the sale or shortly thereafter sign a DMRC use

license. It must be assumed, therefore, that ARCT-France

accepted this obligation as an amendment to its 1954 agree-

ment with Chavanoz. The 1962 agreement which consoli-

dated “in a comprehensive instrument” the 1954 agreement

and a “number of verbal agreements” contained an express

6 In 1954 Chavanoz owned no United States patents, and we need

not ponder the question of whether the sale of a machine by ARCT-

France in this country prior to the 1957 Chavanoz-D MRC agreement

to a purchaser not licensed under the HELANCA process would

have carried with it an implied right to use the machine, for in fact no

such sales were made.

A33

Memorandum Opinion—444 F’, Supp. 648 (D.S.C. 1977)

prohibition against the delivery of the machines by ARCT-

France to non-licensed users. In the meantime a similar

prohibition had been incorporated in the 1959 agreement

between ARCT-France and Whitin.

Even if there had been no express limitation on ARCT-

France’s right to sell and deliver to non-licensed users, such

term may be implied from the conduct of the parties.

“Terms may be implied in a contract, not because

they are reasonable, but because they are necessarily

involved in the contractual relationship so that the

parties must have intended but failed to specifically

include them because of their obviousness. Where,

from the nature of a contract and the circumstances

under which made, it is apparent the parties must

have proceeded on the basis that certain conditions

existed, without which its performance would be

unnecessary, the existence of such conditions will be

regarded as implied terms of the obligation. Sacra-

mento Navigation Company v. Salz, 273 U.S. 326,

329 [47 S.Ct 368, 71 L.Ed 663]; Wheeling & L. E. R.

Company v. Carpenter, 218 F. 273 (CCA 6).” Baldwin

Rubber Company v. Paine €& Williams Company, 107

F.2d 350, 353 (6th Cir. 1939).

[671] Plaintiffs cite the intermediate sales by ARCT-

France to Whitin and ARCT, Inc., as further evidence in

support of their exhaustion argument, but in the court’s view

these sales did not serve to free the machines from the use

right restriction any more than if the plaintiffs had pur-

chased directly from ARCT-France. In either case, they

would have purchased from a party who had no use rights

in the machines, a fact well known to all concerned. Thus

the sales remained conditional under the patent laws. Since

ARCT-France’s right to manufacture and sell the machines

was a contractually-limited one, the use rights were effec-

A34

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

tively reserved and Chavanoz and DMRC had the right to

license the use of the machines separately from their manu-

facture and sale, Brulotte v. Thys Company, 379 U.S. 29,

85 S.Ct. 176, 13 L.Ed.2d 99 (1964); General Talking Pic-

tures Corporation v. Western Electric Company, 304 U.S.

175, 58 S.Ct. 849, 82 L.Ed. 1273 (1938) ; In Re Yarn Process-

ing Patent Validity Litigation, 541 F.2d 1127 (5th Cir 1976) ;

Extractol Process, Ltd. vy. Hiram Walker & Sons, Inc., 153

F.2d 264 (7th Cir. 1946).

In the Schwinn case, so heavily relied on by plaintiffs,

the Supreme Court extended the per se doctrine to cover

restrictions imposed by a vendor on the resale by a dis-

tributor of unpatented merchandise as to which the vendor

had surrendered title, dominion and control. The plaintiffs

have cited no case, however, and the court has found none,

extending Schwinn to a restriction imposed by a patentee in

the lawful exercise of his patent monopoly rights.? Having

concluded that the sales by ARCT-France did not exhaust

the patent monopoly, the court declines to apply the

Schwinn doctrine to the facts of this case.

The Grant-Back Clause

Covenants in a license requiring the licensee to assign or »

license any improvements he may make to the patentee,

commonly referred to as “grant-backs”, are not as such

7 Referring to the right to reserve control over a product as to

which a manufacturer has parted dominion or transferred risk of loss

to another, the court in Schwinn said in Footnote 6: “We have no

occasion here to consider whether a patentee has any greater rights

in this respect.” 388 U.S. at p. 379, 87 S.Ct. at p. 1865. The parties

in this case, as have the courts and scholars in cases and commentaries

fullowing Schwinn, have debated the meaning of this rather ambiguous

statement. See an interesting discussion of this subject in Vertical

Restraints on Patented Products and Schwinn: The Case For a Rule

of Reason Approach, 43 George Washington Law Review 239, 251-

252 (November, 1974).

A35

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

inherently illegal. Lransparent-Wrap Machine Corporation

v. Stokes-Smith Company, 329 U.S. 637, 67 S.Ct. 610, 91

L.Ed. 563 (1947). Plaintiffs contend, however, that the

contractual obligation of ARCT-France to assign to Chay-

anoz all rights in improvements in the “patent field” as

defined in paragraph 1 of the 1962 agreement “far exceeds

the scope and form of grant-back obligation exempted from

the per se rule in [Transparent-Wrap]”, and constituted a

per se violation of Section 1 of the Sherman Act as well as

an unreasonable restraint on trade under that statute.

Because the scope of the improvements required to be

granted back by ARCT-France extended substantially be-

yond the scope of Chavanoz’s original patents, the question

here is a close one, but the court has concluded that the

grant-back clause did not in this instance offend the anti-

trust laws. Considerations leading to this determination in-

clude the following:

1. The grant-back had no adverse effect on competition

in the manufacture of false twist machinery. Neither

Chavanoz nor DMRC manufactured machinery, and ARCT-

France’s principal competitor in the United States, Leesona,

was not affected by this grant-back arrangement between

Chavanoz and ARCT-France.

2. ARCT-France was the only manufacturing licensee in-

volved in the grant-back arrangement, and it was free to

incorporate its own inventions in its machines without pay-

ment of further royalties to Chavanoz. Since al] ARCT

machines sold in this country included at least two inven-

tions patented initially to Chavanoz in its own right [672]

(DX 628), the plaintiff use licensees were under a continu-

ing obligation to pay the level royalty rate established by

Chavanoz and DMRC. When new improvements were de-

veloped and incorporated in the machines they were made

A36

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

available to plaintiffs without any increase in this fixed

royalty rate. Thus the plaintiffs were not harmed by the

grant-back arrangement.

3. Invention by ARCT-France was not discouraged by

the grant-back clause. Of the twenty-two patents originally

in suit here twelve were developed by ARCT-France and

assigned back to Chavanoz. Its research and development

efforts obviously were not stifled by the arrangement.

In the early DMRC standard use license form there was

incorporated a grant-back clause applicable to DMRC’s use

licensees, the plaintiffs in this case, but this provision was

deleted in 1961 following an amendment to the Chavanoz-

DMRC agreement. The questions raised by the several

grant-back clauses which continued to appear in the Chav-

anoz-ARCT-France agreements will be re-examined under

the patent misuse section of this memorandum, but at this

point the court is of opinion that the requirement that

ARCT-France assign back to Chavanoz all improvements it

might make in the “patent field” did not rise to the level of

an antitrust violation.

The Price-Fixing Charge

In support of their position on the price-fixing charge

plaintiffs argue that the amount of royalty established by

the agreement between Chavanoz and DMRC which the li-

censees were to pay, and which DMRC consistently main-

tained was non-negotiable, constituted a part of the sales

price of the machines. The fixing of this portion of the

price paid by the Throwsters, the plaintiffs contend, consti-

tuted a per se violation of Section 1 of the Sherman Act.

Here again we find the plaintiffs relying on the assump-

tion that the sale by ARCT-France of the machines ex-

A37

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

hausted the patent monopoly and carried with it an implied

license to use the machines without payment of royalties.

Since the court has been unable to accept this argument, the

charge of price-fixing must be examined in the light of the

unquestioned right of a patentee “to exact royalties as high

as he can negotiate within the leverage of that monopoly.”

Brulotte v. Thys Company, 379 U.S. 29, 33, 85 S.Ct. 176, 179,

13 L.Ed.2d 99 (1964).

Plaintiffs’ reliance on such cases as Ethyl Gasoline Cor-

poration v. United States, 309 U.S. 436, 60 S.Ct. 618, 84

L.Ed. 852 (1940), and United States v. Univis Lens Com-

pany, 316 U.S. 241, 62 S.Ct. 1088, 86 L.Ed 1408 (1942), is

misplaced. In each of those cases the patentee had licensed

a manufacturer to make and sell the patented product but

had reserved the use rights to itself. The patentee had then

issued use licenses to wholesalers and retailers, and in each

license had set the price at which the party could sell to the

next party in the chain. Therefore, on the purported basis

of a retained use license, the patentees had set the price

paid by the first wholesaler to the manufacturer, by the first

retailer to the wholesaler and by the public to the retailer.

The holding in these cases is simply that the Sherman Act

prohibits the use of a patent monopoly to fix the resale price

once the product has passed into the hands of a purchaser

from a manufacturing licensee. They in no way impose a

restriction on the amount a patentee may set as the pur-

chase price for his invention or the amount he may exact

as a royalty for its use. Eastern Venetian Blind Company v.

Acme Steel Company, 188 F.2d 247, 253 (4th Cir. 1951).

In Re Yarn Processing Patent Validity Litigation, 541

F.2d 1127 (5th Cir. 1976), another case relied on by plain-

tiffs, is also distinguishable. In that case the patentee,

Leesona, licensed other manufacturers to make and sell

A38

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

machines incorporating its patents but reserved the right

to charge the purchasers a production royalty one-third of

which was shared with its competitor manufacturers. The

Fifth Circuit held that the sales price of the machinery con-

sisted of two elements, the initial price and the royalty pay-

ments, and that since the royalty rate was not negotiable

by the manufacturers, [673] this portion of the purchase

price of the machinery was fixed. A finding by the district

court of violations of Sections 1 and 2 of the Sherman Act

was affirmed. The court said:

“A patentee may usually exact whatever royalty it

wishes. But Leesona and Permatwist elected to take

a one-third reduction in their royalty income. There

is nothing in the patent laws that allows them to de-

cide unilaterally that the machine manufacturers

would get the entire benefit of their own royalty re-

duction. By allocating this benefit, Leesona guar-

anteed income to the manufacturers and effectively

fixed the price of the machinery. The machinery

manufacturers who participated in the scheme were

protected against free competition and free bargain-

ing in effecting their sales to throwsters.” 541 F.2d

at p. 1136.

Although this court is inclined to agree with the plaintiffs

that the royalties paid by them to DMRC constituted in

effect a part of the purchase price for the machines, the

royalties were not shared with a manufacturer but were

simply retained by Chavanoz and its licensing agent,

DMRC, as the patentee’s reward for its patented inventions.

The court concludes that the plaintiffs’ price-fixing charge

has not been established.

A39

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

The Tying Arrangement

Plaintiffs strongly urge that the defendants conspired to

impose on them a tying arrangement which constituted a per

se violation of Section 1 of the Sherman Act. More speci-

fically, they contend that as a result of the requirement that

they take the DMRC use license, patents and unpatented

technical information were tied to the machines and non-

applicable patents and unpatented technical information

were tied to other patents. Although the facts on which

plaintiffs’ contentions are based may be seen later to justify

a finding of patent misuse, in the court’s view they do not

support the conclusion that the tying arrangement violated

the antitrust laws.

A tying arrangement is an agreement by a party to sell

one product (the tying product) but only on condition that

the buyer also purchase a different (or tied) product. II-

legality under the tying cases is established when it is shown

that the antitrust defendant has sufficient market power

with respect to the trying product to restrain free competi-

tion in the market for the tied product and a not insubstan-

tial amount of commerce in the tied product is affected by

the arrangement. Kentucky Fried Chicken v. Diversified

Packaging, 549 F.2d 368 (5th Cir. 1977); Advance Business

System & Supply Company v. SCM Corporation, 415 F.2d

5D (4th Cir. 1969); JDonlan v. Carvel, 209 F.Supp. 829

(D.Md.1962).

When the tying product is patented sufficient market

power to enforce a tie-in is presumed. United States v.

Loew’s Inc., 371 U.S. 38, 83 S.Ct. 97, 9 L.Ed.2d 11 (1962).

By the same token when the patent itself is employed as

the tying “product” the power of the patentee to require a

licensee to purchase a different product is unquestioned.

A40

Memorandum Opinion—444 F’. Supp. 648 (D.S.C. 1977)

Although the ARCT machines as such were not patented, a

rapid growth in their sales was experienced almost from the

beginning, and for present purposes the court has assumed

with respect to the patents and the machines the defendants

possessed sufficient economic power in the tying products to

enforce the alleged tie-ins at all times. Attention need

therefore be focused only on the question of whether a sub-

stantial amount of commerce in the tied property was af-

fected by the tying arrangement. This in turn involves

identification of the tied product.

Plaintiffs assert that the patents themselves and certain

unpatented “technical information” were tied products—

that they were tied to the machines—and that plaintiffs

were required to take a license under all of the Chavanoz

patents (regardless of their applicability to the machines)

and the unpatented technical information in order to get

the machines.®

[674] Plaintiffs further complain that when the patents

actually applied to the machines are considered as the tying

8 The exact meaning of “technical information” as used here re-

main something of a mystery. In a letter to a Thowster’s attorney

dated April 22, 1961, Armitage of DMRC wrote:

“The machine itself contains structural and functional ele-

ments, some of which are the subject of patents and patent

applications and some of which are included in the technical

information which is made available to the purchaser of the

machine, and this also applies to the process under which the

licensee is licensed. As far as the machine is concerned, ARCT,

the licensed manufacturer, is not permitted to make available

such embodiments of the technical information except to

licensees for their use.”

But there was never any doubt that in order to get the machines a

purchaser had to sign a license. In the same letter Armitage continued :

“In order to get the machine in the first place from the

foreign licensed manufacturer, the purchaser agrees to pay this

continuing royalty under the license for its use.” (PX 215).

A41

Memorandum Opinion—444 F’. Supp. 648 (D.S.C. 1977)

products, this same technical information and many non-

applicable patents were tied to them. The tied products

are thus identified as the unpatented technical information

and certain patents which admittedly were never applic-

able to any of the machines purchased by the plaintiffs.

The question thus becomes: Was a substantial amount

of commerce in these tied products affected by the tying

arrangement? The answer must be in the negative. The

rationale underlying the rule in the tying arrangement

cases is that

“(Tying agreements] deny competitors free access

to the market for the tied product, not because the

party imposing the tying requirements has a better

product or a lower price but because of his power

or leverage in another market. At the same time

buyers are forced to forego their free choice between

competing products.” Northern Pacific R. Company

v. United States, 356 U.S. 1, 6, 78 S.Ct. 514, 518,

2 L.Ed.2d 545 (1958).

Such is not the case here. The only serious competitor

of the defendants at the time DMRC’s licensing program

began was Leesona. Like ARCT, it was in the business of

selling yarn texturing machinery embodying its own pat-

ents, and except as it was able to sell these machines to

the plaintiff Throwsters there was obviously no market

among them for its own patents whether adaptable to the

ARCT machines or not. Even if Leesona had possessed

its own brand of the nebulous “technical information”, as

to which the record is silent, it is not readily apparent

how it would have been of any use te the purchasers of

ARCT machines. It follows that the plaintiffs were not

forced to forego their free choice between competing prod-

ucts for there were none.

A42

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

“| Unless a defendant can establish certain

narrow affirmative defenses, a finding that the de-

fendant’s conduct falls within the category of per

se tying arrangements disposes of the case in the

plaintiff’s favor.

“Here, as elsewhere, the per se label can sometimes

prove misleading. Per se analysis is susceptible to

the unwarranted inference that a plaintiff prevails

in a tying case merely by finding some way to charac-

terize the defendant’s conduct as a tie... To bring

a defendant’s conduct within the category of ties

that are per se violations of the Sherman Act, how-

ever, a plaintiff must go beyond some colorable

characterization of the arrangement as fitting this

rough definition.

“A plaintiff must show that the challenged ar-

rangement is in fact a tie: that two separate products

are involved and that, in addition to complying with

the literal terms of the imprecise definition, the

seller’s behavior follows the general pattern found

unacceptable in the earlier tying cases. To measure

an arrangement against that general pattern we

must take into account the principal evils of tie-ins:

they may foreclose the tying party’s competitors

from a segment of the tied product market, and they

may deprive the tie’s victims of the advantages of

shopping around .. .” Kentucky Fried Chicken v.

Diversified Packaging Corporation, 549 F.2d 368,

375 (5th Cir. 1977).

[675] In summary, although the defendants possessed

sufficient market power with respect to the tying products

to restrain free competition in the market for the tied

products if such market had existed, there was no such

market and no commerce in the tied product was affected

A43

Memorandum Opinion—444 F’, Supp. 648 (D.S.C. 1977)

by the arrangement. Clayton Manufacturing Co. v. Cline,

427 F.Supp. 78 (C.D. Cal. 1976). The court therefore fails

to find an antitrust violation in the tying arrangement

charged here.

Some of plaintiffs’ charges in connection with the al-

leged vertical conspiracy will be re-examined later in the

section of the memorandum on misuse of patents, but at

this point the court concludes that these charges have not

been established as antitrust violations.

B. The Horizontal Conspiracy

Plaintiffs’ allegations of conspiratorial conduct of the

defendants and their principal competitor, Leesona which

led to the settlement in 1964 of certain patent litigation

then pending between Leesona and the defendants will now

be considered. Here again we find the facts are not in

substantial dispute, but the parties are poles apart in their

interpretation of the facts and their contentions as to the

legal significance to be given them.

Plaintiffs contend the settlement was the result of a

conspiracy between Leesona and the defendants to preserve

and perpetuate their established production royalty licens-

ing programs in which the royalties charged their licensees

were virtually identical and not subject to reduction; that

this constituted price-fixing in violation of Section 1 of

the Sherman Act; and that defendants also conspired to

monopolize the false twist machinery industry in violation

of Section 2 of the Sherman Act. The defendants deny

any wrongdoing and with equal fervor contend that the

settlement of this “dangerous litigation” was the result

of good faith, arms-length bargaining by the adversary

parties all of whom were exercising sound, reasonable and

lawful business judgment.

Ad4

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

FACTUAL BACKGROUND

The agreement between Chavanoz and DMRC for the

licensing in the United States of the ARCT machines was

signed on December 31, 1957. At that time the only manu-

facturer of false twist machines in the American market

was Leesona which had begun developing a continuous

process false twist machine in the early 1950’s and which

it began to market in late 1954. This was the Leesona

Model 550 or Superloft machine.

Meanwhile, the Permatwist partnership had begun build-

ing and marketing attachments for converting conventional

textile texturing machines to produce crimped yarns by

false twisting. Permatwist filed three patent applications

in January, 1954 covering its machine and process which

it was marketing under the trademark “Fluflon”.

In December, 1954, Leesona and Permatwist entered into

an agreement whereby Leesona acquired the pending Perma-

twist patent applications which eventually matured into

United States Patents Nos. 2,803,105, 2,803,108 and 2,803,-

109, all of which were issued on August 20, 1957. In this

agreement Leesona acquired the rights to other related

inventions and future improvements as well as Permatwist’s

rights under its outstanding license agreements covering

the Flufion machines previously sold. In return Perma-

twist was to receive a share of all royalties collected by

Leesona and a portion of the selling price of Leesona’s

false twist machinery. Thereafter Leesona marketed both

the Flufion machinery and its own Superloft machine.

In the inception the Leesona-Permatwist agreement did

not require a production royalty to be charged on the

Superloft machines, but purchasers were required to take

—

A45

Memorandum Opinion—444 F’. Supp. 648 (D.S.C. 1977)

a license under the Permatwist patent applications, and

the Fluflon attachments were continued to be sold on a

production royalty basis. In early 1957 when Leesona

began marketing its Model 511 or “Saaba” attachment for

use in post-treating stretch yarns produced by the false

twist process, purchasers, although required to sign a [676]

license agreement, were not required to pay a continuing

production royalty.

When Chavanoz and DMRC began to consider introduc-

ing the ARCT machinery into the United States under a

continuing production royalty license Leesona’s Superloft

machine was the only integrated false twist machine then

being sold in the United States. Chavanoz and DMRC

recognized that since the Superloft was being sold on a

royalty-free basis, it would seriously affect their proposed

production royalty program. Recognizing this threat from

the Leesona competition DMRC and Chavanoz had inserted

in their 1957 agreement a provision that the production

royalty to be charged purchasers of the ARCT machinery

would be five per cent of the manufacturer’s list price of

the raw yarn processed on the machines but that if there

were “substantial unlicensed competition” DMRC could

adjust the rate to as low as two and one-half per cent,

and in view of the continuing sale of the Leesona machines

on a royalty-free basis this was the royalty figure charged

the DMRC licensees from the beginning.

In an effort to solve this unlicensed competition problem

Chavanoz notified Leesona at a time when its dealings with

DMRC were still in the negotiation stage that the Super-

loft machine infringed one or more of the Chavanoz false

twist patent applications and suggested that Leesona

should take a license under the Chavanoz patents. Leesona

declined these suggestions, but Chavanoz never went so

A46

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

far as to threaten Leesona with litigation based upon its

alleged infringement of any Chavanoz patent, and in fact

the Chavanoz patents have never been asserted against the

Leesona machines in this country.’

The next approach adopted by Chavanoz and DMRC

was the institution in November, 1957, by DMRC of an

action in the United States District Court for the Eastern

District of New York (the “Brooklyn litigation”) in which

DMRC undertook to obtain the Leesona false twist patents

for itself. The complaint was based on the grant-back pro-

visions in an earlier contract between DMRC and Leesona

relating to DMRC’s edge-crimping (“Agilon”) process.

Had this suit been successful, DMRC would have been

able to bring the Leesona patents under the Chavanoz-

DMEC licensing program then being negotiated, and the

elimination of this unlicensed competition would have per-

mitted establishment of the DMRC royalty rate at 5%,

the maximum rate fixed by the Chavanoz-DMRC agreement.

Leesona eventually won the suit, Deering Milliken Re-

search Corporation v. Leesona Corporation, 201 F.Supp.

776 (E.D.N.Y. 1962), aff'd, 315 F.2d 475 (2nd Cir. 1963),

but in the meantime its outcome had been rendered irrele-

vant by another development. Prior to the sale of the first

ARCT machine in the United States Leesona instituted a

new production royalty program of its own, and this

cleared the way for Chavanoz and DMRC to do likewise.

Leesona’s new program followed shortly after its develop-

ment of a high-speed spindle which greatly increased the

9in February, 1959, Chavanoz sued Leesona in France, claiming

that the sale and use of the Superloft machines in that country in-

fringed three Chavanoz patents which were the counterparts of its

United States Patents Nos. 2,741,893, 2,761,272 and 2,780,047. This

suit was included in the litigation settled in this country in 1964.

A47

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

spindle speed of its false twist machines. Under its new

program Leesona required purchasers of its false twist

machines incorporating its new high speed spindles to sign

a license agreement providing for a production royalty of

6¢ per pound on 70 denier yarn.'’® Leesona thereafter ap-

plied the same basic royalty schedule to its later model

machines.

DMRC received a copy of Leesona’s new license agree-

ment on or before October 10, 1958, which was shortly after

the decision to implement the licensing program had been

made, and this decision was embodied [677] in a modifica-

tion of the Leesona-Permatwist agreement on Octobe. 17,

1958. Although it had not licensed any purchasers of

the ARCT machines at that time, DMRC did not move

immediately to bring its royalty rate in line with Lee-

sona’s,!!

Sales of the ARCT machines by Whitin in the United

States began in 1959, and on April 1, 1960, Leesona insti-

tuted an action in the United States District Court for the

Western District of South Carolina against the Judson

Mills Division of Cotwool Manufacturing Company (a cor-

porate predecessor of DMI) for infringement of the three

patents which it had obtained from the Permatwist applica-

tions (the 7105, 7108 and ’109 patents) allegedly resulting

from Judson’s use of its ARCT machines (the “Cotwool

litigation”). Shortly thereafter there was instituted in the

10 Denier is a unit of weight for yarns of all materials, natural and

synthetic, equal to .05 gram per 450 meters. From 1957 and continu-

ing into the late 1960’s 70 denier nylon yarn constituted a major

portion of the yarn being processed on false twist machines.

1! The initial DMRC royalty of 2'’4% of the manufacturer's pub-

lished list price for raw yarn worked out to approximately 412¢ per

pound for 70 denier nylon based on the then prevailing list price of

$1.71 per pound. This list price remained in effect for ten years or

more thereafter.

A48

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

name of Whitin against Leesona in the United States Dis-

trict Court for the District of Massachusetts a suit for

a declaratory judgment that the three Leesona false twist

patents were invalid, unenforecable and not infringed by

the use of ARCT false twist machines (the “Whitin litiga-

tion”). Chavanoz and DMRC were the guiding hands be-

hind the institution and prosecution of this suit in Massa-

chusetts.

In November, 1961, Leesona also began an arbitration

proceeding against Schwarzenbach-Huber, one of the plain-

tiffs herein, which was licensed both by Leesona and

DMRC, in which Leesona attempted to collect royalties

under its license by reason of Schwarzenbach-Huber’s op-

eration of its ARCT machines. Under its licensing agree-

ment DMRC was obliged to defend this arbitration pro-

ceeding.

Other legal confrontations between DMRC and Leesona

occurred in the United States Patent Office where DMRC

undertook through interferences with Leesona to gain con-

trol of Leesoza’s 108 patent and its post-treating Saaba

patent No. 2,864,229.

Shortly after the institution of the Cotwool and Whitin

litigations, Warren A. Seem, one of the Permatwist part-

ners, wrote to Armitage of DMRC on December 27, 1960

and suggested that negotiations looking to a settlement of

the controversies then pending in “three different arenas”

should be undertaken.

“TWle propose that instead of slugging it out in

the public square, we join hands and do something

good for the industry as well as ourselves.

“(T]he opponents are now engaged in licensing

identical processes requiring endless patent litiga-

tion. To us it looks like both sides are bound and

A49

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

determined to destroy each other and harm the in-

dustry they both desire to serve.

“However, being quite familiar with both sides,

either by personal contact or reputation, we do not

have the slightest doubt that all differences can be

settled at the conference table and to the mutual

advantage of all concerned. As unauthorized inter-

mediaries, we would like to know whether you are

willing to give the conference table another try.”

(DX 136).

Shortly thereafter meetings were held in early 1961 at

which proposals were advanced for settling the Cotwool,

Whitin and Brooklyn litigations and the patent interfer-

ences. Leesona proposed that DMRC take a Leesona

standard manufacturer’s license under the terms of which

DMRC would receive one-third of the royalties collected.

DMRC proposed that the Cotwool and Whitin suits be

dismissed with admissions only of the validity of the

Leesona patents. During the first meeting Davis of Leesona

and Seem confirmed to Armitage of DMRC that the Leesona

royalty on 70 denier yarn was 6¢ per pound.

Meanwhile Leesona continued to license other potential

competitors in the false twist manufacturing field by shar-

ing one-third of its royalties with them in return for a

license to sell false twist machines only to Leesona’s

licensees. Unlike normal license arrangements, these com-

peting [678] manufacturers, eventually about thirteen in

all, paid Leesona nothing for their freedom from its in-

fringement claims but instead were rewarded by a share of

the royalties collected by Leesona.'”

12In the same year the present litigation was instituted, 1969,

Leesona became the defendant in numerous actions brought by pur-

chasers of its false twist machinery challenging the validity of the

(footnote continued on following page)

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

In March of 1961 Leo Soep, representing Chavanoz,

Warren Seem, the Permatwist partner, and Robert Conrad,

counsel for Leesona, had a conference in London concern-

ing false twist matters, and during the course of their

discussions Soep suggested terms upon which the United

States litigation might be settled. Reporting on this con-

ference to Armitage, Soep said:

“As you will remember the DMRC/Chavanoz

agreement provides for a royalty reduced to one-

half its amount as long as there is substantial un-

licensed competition.

“Suppose an agreement is reached with Leesona

whereby mutual cross-licensing takes place with the

promise of non-assertion of clients, then DMRC will

be entitled to increase the rate, and we can consider

a split of the increased rate between the three of us.

“Conrad is interested in this proposal but men-

tioned that he would like an overall arrangement with

DMRC...

(footnote continued from preceding page)

Leesona patents and asserting antitrust claims. Several of the plain-

tiffs in the present litigation were parties plaintiff to those actions

which were finally consolidated in the United States District Court

for the Southern District of Florida and assigned to the Honorable

Clyde Atkins, United States District Judge. In an order of July 11,

1974, Judge Atkins granted summary judgment holding the manu-

facturing license agreements mentioned herein which Leesona had

signed with the various machinery manufacturers to be in violation

of Sections 1 and 2 of the Sherman Act. This decision was affirmed

by the United States Court of Appeals for the Fifth Circuit on

November 5, 1976. In Re Yarn Processing Patent Validity Litigation,

541 F.2d 1127, rehearing and rehearing en banc denied, February 3,

1977 [cert. denied, Lex. Tex. L.T.D., Inc. v. Universal Textured

Yarns, Inc., 433 U.S. 910, 97 S.Ct. 2976, 53 L.Ed.2d 1094 (1977) }.

Although as previously noted this case is not regarded as controlling

on the price-fixing aspect of the alleged vertical conspiracy, it is

considered, as will be seen, to be highly germane to the alleged

horizontal conspiracy.

Adl

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

“T do not mind to tie in the Chavanoz problems

with the specific DMRC ones if necessary, but I feel

that this is not entirely the case. However if it serves

your interest, I do not mind.” (PX 1043).

The Soep proposal met with strong objection by Waters

of Whitin who could see only a doubling of the DMRC

royalty rate while the Leesona rate remained the same

thus making it more difficult for him to sell the ARCT

machines in the face of the Leesona competition. And, of

course, since Whitin did not share in the production roy-

alties in any event, there was nothing in the Soep proposi-

tion for Whitin.

Apparently nothing came of the 1961 settlement discus-

sions, and between 1961 and 1963 the record reflects no

further formal settlement negotiations. During this period

the Cotwool litigation was consolidated with the Whitin

litigation in the District of Massachusetts over Leesona’s

strong objection, and the Schwarzenbach-Huber arbitra-

tion proceeding was stayed from March, 1961, until April,

1963.

On May 21, 1963, Albert Davis, house, counsel for Lee-

sona on patent matters, and Soep met in Paris to discuss

the possibility of settling both the United States and French

litgations, and Soep’s memorandum of the conference made

the following day indicates that Davis renewed Leesona’s

previous proposal that it grant to Chavanoz and its affili-

ates a license to manufacture and sell false twist machinery

to Leesona’s licensees and that Leesona’s standard license

agreement be modified to the extent necessary to make it

applicable to users of the ARCT machines. The royalty rate

would continue at 6¢ per pound for 70 denier yarn and

Leesona would pay Chavanoz and its affiliates one-third

A52

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

of the royalties collected from the licensed users of the

ARCT machines. Soep further reported:

“Chavanoz having consulted DMRC, has obtained

from this company the agreement in principle to

sharing royalties [679] presently received with Lee-

sona. There are three variations possible:

“(a) DMRC reduces its royalties by a certain

amount, Chavanoz by a larger amount, and the total

sum of this deducted royalty is, paid by DMRC and

Chavanoz to Leesona in exchange for a hold harmless

clause.

“(b) Chavanoz and DMRC pay an annual fixed

royalty taken from royalties received from their

customers to Leesona against an exchange of a hold

harmless clause and

“(¢) Chavanoz and DMRC pay a fixed sum in one

payment to Leesona against an exchange of a hold

harmless clause.

“An intermediate solution has also been endea-

vored: Chavanoz and Leesona pool their interests

and form a non-profit joint association, for the pro-

motion of stretch yarn in the U.S. This organization

would do the showing of both type of machinery

produced by Leesona and by ARCT so that a reduc-

tion of promotion costs would result to the benefit

of Leesona and of Chavanoz.

“This solution should, however, be considered very

carefully from the angle of antitrust law.” (PX

363).

Following the discussions between Davis and Soep there

were discussions between Davis and Whitin’s house counsel,

Ward Smith, in May and June of 1963, which led to a

A5d3

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

conference between the principals on June 18, 1963, at the

.Algonquin Club in Boston. At this meeting apparently

neither side was willing to make any substantial change

in its previous negotiation position, and the consequence

was that the meeting broke up without much having been

accomplished toward settlement.

Prior to the Algonquin conference, however, there had

been one significant development on the DMRC side. On

June 12, 1963, despite the problems Whitin was having

in selling machines because of the pendency of the litiga-

tion, DMRC, Chavanoz and Whitin agreed to raise the

DMRC production royalty rate from 212% to 34%. This

increase brought the DMRC royalty rate in line with Lee-

sona’s with respect to 70 denier nylon yarn since applica-

tion of the new rate to the long-established list price of

$1.71 per pound for the raw yarn resulted in a charge of

$.05985 per pound as against Leesona’s 6¢ per pound. The

new agreement provided that .6% of the royalties to be

collected would go directly to DMRC and the remaining

2.9% would go into an escrow fund to be refunded to

DMRC’s new licensees in the event the litigation with

Leesona terminated adversely to Chavanoz and its affiliates.

Following the Algonquin conference apparently no fur-

ther settlement discussions occurred between the adver-

saries until late 1963 when it became known that the Cot-

wool and Whitin litigations which had been consolidated

would be scheduled for trial in Boston early in 1964. How-

ever, the subject of settlement remained alive between Lee-

sona and the Permatwist partners whose interest would

be affected by any settlement because of their arrangement

with Leesona. In a memorandum of a conference with

Permatwist on August 6, 1963, Robert Leeson recorded

that

Ad4

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

“What we offer [Permatwist] is a good deal on

any way of looking at it. 1. Approx. 10% on value

of machine export, and 2. One-half of royalty

(illegible) and we do everything in our power to sell

machines so we can get (illegible) .04 for both of

us; and everything to settle so that all competitors

charge a royalty.” (PX 353).

In December, 1963, Leesona was able through certain

procedural maneuvers to forestall an immediate trial of the

case in Boston, and on January 23, 1964, Armitage and

Leeson had a further settlement conference. Like its

predecessors this conference resulted in an impasse, Armi-

tage maintaining the position that Leesona should accept

a lump sum settlement based on the estimated cost of con-

tinuing the litigation and Leeson continuing to insist that

the ARCT licenses be licensed under the Leesona patents

and that production royalties be divided two-thirds to

Leesona and one-third to DMRC/Chavanoz. Reporting on

this conference Leeson wrote that he told Armitage

[680] “. . . that he should ask Soep to reconsider

his mathematics—there is more at stake than the

cost of a suit. If you win, you lose, and if you lose,

you lose—because if the patent is broken, there will

be no royalty.” (PX 338).

Armitage thereafter reported this conference to Roger

Milliken, president and chief executive officer of the Deering

Milliken enterprises, and a few days later Milliken conferred

with Leeson. This was followed by another conference

between Milliken and Leeson in February of 1964, and in

consequence of this second conference Armitage prepared

and mailed to Leeson a draft of a settlement proposal on

March 3, 1964, which incorporated Armitage’s understand-

ing of the conversations between Milliken and Leeson.

A55

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

Meanwhile, on February 28, 1964, a Canadian court had

rendered a decision upholding the Leesona patents in an

action brought against Leesona in Canada by the Scragg

Company, a British manufacturer of false twist machinery.

There is no evidence that this decision had been brought to

the attention of Armitage before he prepared the settlement

draft sent to Leeson four days later, and the court is satis-

fied that this proposed settlement draft was the outgrowth

of Milliken’s conferences with Leeson and was in no way

inspired by the Canadian court’s decision in the Scragg

case.'?

Negotiations over the specific terms of the agreement

continued throughout March, 1964, and on March 20, 1964,

Davis of Leesona mailed Armitage a draft settlement agree-

ment which contained the same basic provisions as the agree-

ment finally signed. The parties mutually covenanted not

to sue each other’s licensees and DMRC agreed to pay

Leesona $150,000 out of future royalties, a figure arrived

at after Armitage had given Leeson an estimate of DMRC’s

projected royalty income. In a recorded telephone discus-

sion of this draft agreement between Armitage and Davis

on March 24, 1964, it was agreed in view of its antitrust

implications to delete a provision which would have required

13 As a matter of fact there were findings in this Canadian case

which would have been favorable to DMRC’s efforts to invalidate the

Leesona patents under Section 102 of the United States patent law,

35 U.S.C. § 102. In the Canadian case it was to Leesona’s interest

that it establish the earliest invention date possible for the Canadian

counterparts of its United States patents Nos. 105, 108 and 109,

and it alleged that the inventions embodied in those patents were in

fact made in July 1947, a position which the Canadian court in effect

adopted. In the Florida litigation, Jn Re Yarn Processing, supra,

Judge Atkins held Leesona collaterally estopped to assert to the

contrary, and he invalidated the United States patents on summary

judgment in a decision reported in 360 F.Supp. 74 (1973), which

was later reversed in another appeal, Jn Re Yarn Processing Patent

Validity Litigation, 498 F.2d 271 (Sth Cir. 1974).

AS6

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

DMRC to maintain its rate of payments toward the $150,000

even if DMRC reduced its royalty rate. Armitage explained

to Davis that DMRC’s only source of revenue was the

royalties and that if either side reduced royalties the other

would have to do so. Armitage went on to explain that

“there is no reason for us to reduce royalties unless you

force us to do so”, and Davis agreed with this. Armitage

further stated that he would dislike to have anything in the

agreement “that looks like a penalty against reducing roy-

alty rates because I have in mind this antitrust thing.”

(PX 222).

Although the final settlement apparently was not agreed

upon until some time in April, four settlement agreement

documents between defendants and Leesona were signed as

of March 31, 1964, the principal one with which the present

litigation is concerned being the one that settled all existing

litigation between the parties in the United States (PX 223,

Tab A).

The agreement is in the form of an exchange of mutual

cross-covenants of the parties not to sue each other or

customers of the other under certain listed existing patents

with respect to presently existing and future machines and

under specified existing paténts as well as future patents

with respect to presently existing machines provided the

machines are licensed either by Leesona or Chavanoz. Un-

licensed machines [681] receive no protection, and in his

recorded telephone conversation with Davis Armitage had

stated “. . . if they are not licensees we are not interested

in what you do to them and you are probably not interested

in what we do to them. . .” As consideration for the settle-

ment DMRC agreed to pay Leesona 10% of the DMRC

royalties collected until $150,000 had been paid. All of the

litigation pending between the parties in the United States

A57

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

was to be dismissed without prejudice with each side bear-

ing its own costs.

The actual terms of the settlement were not made public,

but in a jointly issued press release the out-of-court settle-

ment of all stretch yarn patent litigation previously pending

between the parties was announced. The press release con-

tained the statement that the settlement had followed “close

on the heels of the February 28, 1964 decision” of the

Canadian court upholding the validity of Leesona’s stretch

yarn patents in Canada (PX 343). Although factually

accurate, this statement was misleading for that, as previ-

ously stated, the court is satisfied that the Canadian court

decision was not a motivating factor in the settlement.

Further evidence that it was not is to be found in the fact

that instead of bolstering Leesona’s bargaining position as

might have been expected, the Canadian decision apparently

had no such effect, for it was Leesona and not DMRC which

finally retreated from its hard line position in which it had

consistently refused to offer a settlement on any basis other

than a two-thirds/one-third split of royalties with DMRC

with Leesona receiving the larger share.

The settlement agreement itself contained a recital which

made it appear to settle more than was actually involved in

the pending litigation when it stated that “Chavanoz, DMRC

and Whitin allege that certain of the aforementioned Chava-

noz patents are infringed by the manufacture, sale or use

of certain Leesona yarn processing equipment by Leesona

and/or its customers”. The fact is that the possible infringe-

ment of Chavanoz’s United States patents by Leesona had

never been an issue in any of the litigation and that these

patents had never been formally asserted against Leesona.

Certain documents written shortly after the consumma-

tion of the settlement agreement shed further light on the

A58

Memorandum Opinion—444 F’. Supp. 648 (D.S.C. 1977)

intent of the parties with respect to the reasons underlying

the settlement. For instance, following a telephone confer-

ence with Armitage concerning the wording of the joint

press release to be issued a Whitin vice president wrote to

Armitage a “personal and confidential” letter dated April

8, 1964, in which he stated:

“We grant the desirability of indicating to the

world at large that the Leesona and Chavanoz patents

are strong and that competition against them from

any outside source would be difficult at best.” (PX

344).

A few days later Armitage wrote to a Finnish manu-

facturer of false twist machines who was seeking a United

States representative and explained that as a result of the

March 31, 1964 settlement agreement the validity of the

Leesona patents was undisputed and that “this would put

a very considerable burden upon anyone attempting to in-

troduce another false twist machine in the United States.”

(PX 533).

Another example of the cooperation between these parties

following the settlement was the action of Armitage follow-

ing his receipt of notice that Turbo Machine Company

planned to offer for sale on a royalty-free basis a limited

purpose texturizing machine of the false twist type. Recog-

nizing that “this development can be harmful to our pro-

gram”, Armitage requested that a study be made to deter-

mine if the Turbo machine infringed any of the Chavanoz

patents at the same time observing that the Turbo machine

probably infringed Leesona’s patents, and if so, that he

“should like to call this to Leesona’s attention for whatever

action they may feel advisable to take.” (PX 463).

In summary, the massive volume of evidence offered at

the trial and again reviewed in detail post-trial has served to

A59

Memorandum Opinion—444 F.. Supp. 648 (D.S.C. 1977)

[682] satisfy the court by its substantial preponderance that

the dominant purpose of the March 31, 1964 agreement, as

reflected in the statements and conduct of the participants

both before and after that date and in the terms of the

agreement itself, was anti-competitive, that purpose being

to preserve and enhance the interdependent royalty pro-

grams of Leesona and Chavanoz/DMRC which a trial of

the pending litigation might well have destroyed. The court

is unable to accept the explanation proffered by DMRC and

Chavanoz that they feared the Leesona patents might be

upheld, for they had long had the opinion of eminent counsel

that these patents were invalid, a judgment which was

temporarily vindicated by Judge Atkins in the Florida

litigation.'* The validity of the Chavanoz patents was not

jeopardized, for the validity of these patents had not been

brought into issue in the litigation. Nor was concern for

the sales of ARCT machines a basis for the settlement, the

evidence showing that the sales of these machines at the

time of the settlement were booming.

A contention advanced by Robert Waters in his testimony

that a Leesona victory in the litigation would have put

Whitin out of business is not convincing. It is true that a

judgment holding the Leesona’s patents valid would have

allowed Leesona’s license program to continue, and if the

judgment had also held the ARCT machines to infringe

the Leesona patents, it would have been necessary to license

them under the Leesona patents. In this event, however,

Whitin and ARCT-France would have been entitled to one-

1 As noted in Footnote 13, Judge Atkins held the Leesona patents

invalid on summary judgment, but on appeal the Fifth Circuit held

there were issues of fact requiring a trial. In Re Yarn Processing

Patent Validity Litigation, 498 F.2d 271 (1974). The court under-

stands that thereafter there were various settlements and that no trial

to test the validity of the Leesona patents was held.

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Memorandum Opinion—444 F.. Supp. 648 (D.S.C. 1977)

third of the production royalties collected by Leesona at

least until the Leesona licensing program for its competitor

manufacturers was knocked out by the Fifth Circuit in the

In Re Yarn Processing case, supra. Leesona doubtless would

have offered its standard manufacturer’s license to Whitin,

for its first offer of settlement of the Whitin litigation to

which it adhered almost to the end contemplated this very

arrangement. Thus Whitin for the first time would have

become a beneficiary rather than a reluctant and unpaid

participant in a production royalty program.

In addition to the foregoing findings of fact with respect

to the alleged horizontal conspiracy the court expressly

adopts as its own the following proposed findings of fact

submitted by the parties.

1. Plaintiffs’ proposed findings of fact on the antitrust

issues Nos. 15.1-15.10 inclusive, 15.12-15.27 inclusive, 15.29-

15.53; 15.55-15.60 inclusive, 15.61 except for its last para-

graph, 15.62-15.82 inclusive, 15.84 and 15.85; also 15.54

omitting “ARCT-France.”

2. Chavanoz, DMRC and DMI proposed findings of fact

on the anti-trust issues under Section II, Nos. 1-25 inclusive,

the first sentence in No. 26, 27, 28, 30-34 inclusive, the first

sentence of 35, 36, 37 except for its first sentence, and with

this addition: “In the case of Gibbs and Smith, they took

a Leesona manufacturer’s license in which Leesona paid

them to sell to its licensees while there were lucrative side

deals in favor of both Madison and Burlington.” (See PX

1249; PX 1250; Tr. Vol. 83, pp. 16,096-103) ; No. 38, the first

sentence only of 39, 42-58 inclusive, 60-63 inclusive, 66, 68,

the first sentence only of No. 70, 73, 75, 77, 79-81 inclusive,

82 with the exception of the statement in parenthesis, the

first four sentences of No. 83, 84-86 inclusive, 88, 94 except

for its last two sentences, 95-98 inclusive, 100, the first

sentence of 101, 105, 117 and 118.

A61

Memorandum Opinion—444 F., Supp. 648 (D.S.C. 1977)

3. ARCT-France’s proposed findings of fact Nos. 35

with the exception of the clause in the first sentence reading

“to the point where only one or two sales were made during

the entire year 1962”, 36, 37, 39, the first sentence only of

No. 40 and 42.

4. ARCT, Ine.’s proposed findings of fact Nos. 43-45

inclusive, 47 except for its last paragraph, 48 except for the

last sentence [683] in the second paragraph and the entire

last paragraph 72, 73, 81-84 inclusive, 86 and 87.

Additional findings of fact will be made later in connec-

tion with the individual cases of DMI, ARCT-France and

ARCT, Ince.

LEGAL CONCLUSIONS—

HORIZONTAL CONSPIRACY

I. Jurisdiction and Venue.

The court has jurisdiction of these actions under 28 U.S.C.

§§ 1331, 1332, 1337, 1338, 2201 and 2292 and under 15 U.S.C.

§§ 15 and 26. Venue is proper under 28 U.S.C. §§ 1291(¢)

and 1291(d) and under 15 U.S.C. §§ 15 and 22.

The commerce involved in or affected by the matters in

controversy is interstate and foreign commerce within the

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

§§ 1 and 2, and the Wilson Tariff Act, 15 U.S.C. § 8.

II. Liability of Defendants.

The application of settled antitrust legal principles to the

fact findings detailed above has led the court to conclude

that there accompanied the settlement of March 31, 1964,

the intent and an implicit agreement to stabilize and main-

tain production royalty rates and to monopolize the false

twist machinery market in the United States; and that th

A62

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

actions pursuant thereto by at least some of the parties con-

stituted violations of Sections 1 and 2 of the Sherman Act.

These principles will now be reviewed and their application

to the conduct and actions of the separate defendants will

be considered.

1. Although settlements of patent litigation are normally

as desirable as settlements of other types of litigation, Aro

Corporation v. Allied Witan Company, 531 F.2d 1368 (6th

Cir. 1976), settlements of such litigation are not sanctioned

by the courts when they are attended by anti-competitive

results. United States v. New Wrinkle, Inc., 342 U.S. 371,

72 S.Ct. 350, 96 L.Ed. 417 (1952); United States v. Line

Material Company, 333 U.S. 287, 68 S.Ct. 550, 92 L.Ed. 701

(1948) ; Standard Oil Company v. United States, 283 U.S.

163, 51 S.Ct. 421, 75 L.Ed. 926 (1931); Duplan Corporation

v. Deering Milliken, Inc., 540 F.2d 1215 (4th Cir. 1976) ;

Westinghouse Electric Corporation v. Bulldog Electria

Products Company, 179 F.2d 139 (4th Cir. 1950).'*4

2. Agreements in violation of the antitrust laws may be

inferred from the actions and conduct of the parties and

need not rest solely on direct testimony. United States v.

Container Corporation of America, 393 U.S. 333, 89 S.Ct.

510, 21 L.Ed.2d 526 (1969); United States v. Masonite

Corporation, 316 U.S. 265, 62 S.Ct. 1070, 86 L.Ed. 1461

(1942); Interstate Circuit, Inc. v. United States, 306 U.S.

208, 59 S.Ct. 467, 83 L.Ed. 610 (1939) ; Eastern States Retail

Lumber Dealers Association v. United States, 234 U.S. 600,

34 S.Ct. 951, 58 L.Ed. 1490 (1914).

“Acceptance by competitors, without previous

agreement, of an invitation to participate in a plan,

144 See Timberg, “Antitrust Aspects of Patent Litigation, Arbitra-

tion and Settlement,” 59 Journal of the Patent Office Society 244

(April 1977).

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Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

the necessary consequence of which, if carried out,

is restraint of interstate commerce, is sufficient to

establish an unlawful conspiracy under the Sherman

Act.” Interstate Circuit, Inc. v. United States, supra,

306 U.S. at p. 227, 59 S.Ct. at p. 474.

3. However, proof of agreement, express or implied, is

indispensable to the establishment of a conspiracy under

the antitrust laws, and evidence of consciously parallel

behavior of competitors, while affording some proof of

agreement, is not conclusive. Theatre Enterprises, Inc. v.

Paramount Film Distributing Corporation, 346 U.S. 537,

74 S.Ct. 257, 98 L.Ed. 273 (1954).

4. Even if alleged antitrust violators do not intend anti-

competitive results, a conspiracy between them may yet

be proven by a series of actions purposely taken by them

which have an anti-competitive result. [684] United States

v. Singer Manufacturing Company, 374 U.S. 174, $3 S.Ct.

1773, 10 L.Ed.2d 823 (1963) ; American Tobacco Company v.

United States, 328 U.S. 781, 66 S.Ct. 1125, 90 L.Ed. 1575

(1946).

0. Horizontal price-fixing constitutes are per se violation

of Section 1 of the Sherman Act. United States v. Container

Corporation of Ameria, supra; Hartford-Empire Company

v. United States, 323 U.S. 386, 65 S.Ct. 373, 89 L.Ed. 322

(1945) ; Standard Oil Company v. United States, 283 U.S.

163, 51 S.Ct. 421, 75 L.Ed. 926 (1931).

6. Action purposely taken to stabilize prices constitute

a per se violation of Section 1 of the Sherman Act. United

States v. Socony-Vacuum Oil Company, 310 U.S. 150, 60

S.Ct. 811, 84 L.Ed. 1129 (1940); United States v. Gasoline

Retailers Association, 285 F.2d 688 (7th Cir. 1961).

7. An inference of conspiracy may be drawn from the

fact that competitors maintain parallel pricing structures

A64

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

which are interdependent. Wall Products Company v. Na-

tional Gypsum Company, 326 F.Supp. 295 (N.D.Cal.1971).

S. In eases involving patents if an agreement transcends

what is necessary to protect the use of the patent or the

patent monopoly it may be found to violate the antitrust

laws. Standard Sanitary Manufacturing Company v.

United States, 226 U.S. 20, 33 S.Ct. 9, 57 L.Ed. 107 (1912).

9, Although an arrangement under which patents are

pooled is not per se illegal,

“Ti]f combining patent owners effectively dominate

an industry, the power to fix and maintain royalties

is tantamount to the power to fix prices ... Where

domination exists, a pooling of competing process

patents, or an exchange of licenses for the purpose

of curtailing the manufacture and supply of an un-

patented product, is beyond the privileges conferred

by the patents and constitutes a violation of the Sher-

man Act. The lawful individual monopolies granted

by the patent statutes cannot be unitedly exercised to

restrain competition.” Standard Oil Company v.

United States, 283 U.S. 163, 174, 51 S.Ct. 421-425, 75

L.Ed. 926 (1931).

10. Patents as exceptions to the general rule against

monopolies are affected with a public interest.

“The far-reaching social and economic consequences

of a patent, therefore, give the public a paramount

interest in seeing that patent monopolies spring from

backgrounds free from fraud or other inequitable

conduct and that such monopolies are kept withia

their legitimate scope.” Precision Instrument Manu-

facturing Company v. Automotive Maintenance Ma-

chinery Company, 324 U.S. 806, 816, 65 S.Ct. 993, 998,

89 L.Ed. 1381 (1945).

A65

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

Authoritative testing of patent validity is encouraged, and

the doctrine of licensee estoppel is no longer the law. Lear

v. Adkins, 395 U.S. 6538, 89 S.Ct. 1902, 23 L.Ed.2d 610

— (1969).15

11. The two elements of monopolization under Section 2

of the Sherman Act are (1) the possession of monopoly

power in the relevant market and (2) intent to monopolize.

The willful acquisition or maintenance of monopoly power

as distinguished from growth or development in conse-

quence of a superior product, business acumen or historic

accident is evidence of an intent to monopolize. United

States v. Grinnell Corporation, 384 U.S. 563, 86 S.Ct. 1698,

16 L.Ed.2d 778 (1966).

12. Section 2 of the Sherman Act condemns any enter-

prise which has exercised power to control a defined market

if that power is to any substantial extent the result of bar-

riers erected by its own business methods—even though

not predatory, immoral or violative of Section 1 of the

Act—unless it is shown that the barriers [685] are ex-

clusively the result of superior skills, superior products,

natural advantages, business acumen or the like. United

States v. United Shoe Machinery Corporation, 110 F.Supp.

295 (D.Mass. 1953), aff'd, 347 U.S. 521, 74 S.Ct. 699, 98

L.Ed. 910 (1954).

13. The use of monopoly power, however lawfully ac-

quired, to foreclose competition, to gain a competitive ad-

vantage or to destroy a competitor is a violation of Section

'S The change in the law wrought by Lear v. Adkins made possible

the present litigation. For an insightful commentary on the case by

the Honorable Simon H. Rifkind, of counsel here, see American

Patent Law Association Bulletin, October-November, 1972, p. 696

at p. 699 et seq.

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Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

2 of the Sherman Act. United States v. Griffith, 334 U.S.

100, 68 S.Ct. 941, 92 L.Ed. 1236 (1948).

14. To support a recovery under either Sections 1 or

2 of the Sherman <Act it is necessary for a plaintiff to

show that by reason of the violation complained of he has

been injured in his business or property. Section 4 of the

Clayton Act, 1° U.S.C. § 15.

The task of applying these settled principles to the facts

of this case must now be performed.

A. Liability of Chavanoz and DMRC.

As has been previously noted, Chavanoz and DMRC

were responsible for the institution and prosecution of the

Whitin litigation in Boston. It was their reaction to the

Cotwool litigation which Leesona had instituted shortly

before in South Carolina. If there is liability, these two

parties are in pari delicto, and the cases against them will

be considered as one.

The conclusion that the royalty programs of Leesona and

Chavanoz/DMRC were interdependent is inescapable. The

record contains plenary evidence of this fact and the

awareness of it by the parties on both sides. Simply stated,

it would not have been economically feasible to market a

false twist machine bearing a substantial production royalty

in competition with one being sold royalty-free. The natural

result was a desire on the part of each side to preserve its

own lucrative licensing program.

In order to achieve this mutually-shared objective Lee-

sona, DMRC and Chavanoz entered into the settlement

agreement of March 31, 1964. While on its face the agree-

ment would not seem to offend the antitrust laws, when con-

sidered in the light of the surrounding circumstances and

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Memorandum Opinion—444 F’, Supp. 648 (D.S.C. 1977)

the actions of the parties both before and after its execu-

tion, the conclusion is that the agreement was anti-com-

petitive and a restraint on interstate commerce in violation

of Section 1 of the Sherman Act. This conclusion is sup-

ported by both the direct and circumstantial evidence

previously outlined which in summary form is recapitulated

as follows:

1. At the time of the introduction of the ARCT ma-

chines into the United States in 1959 the false twist

machinery market was completely dominated by Leesona.

2. Since Leesona’s machines were being sold without roy-

alty, it was a matter of concern to Chavanoz and DMRC

that the machines on which they hoped to collect royalties

would be faced by Leesona’s unlicensed competition.

3. Before the ARCT sales program got underway, how-

ever, Leesona instituted its own production royalty pro-

gram.

4. Thereafter Leesona instituted its manufacturers li-

censing program with its unusual provision that competing

manufacturers of false twist machinery instead of paying

royalties to Leesona would in fact receive one-third of the

production royalties being collected by Leesona from its

licensees but on the condition that the licensed manufac-

turers sell only to Leesona licensees.

5. The increase in DMRC’s royalty rate brought it in

line with Leesona’s rate on 70 denier yarn which constituted

about 80% of the false twist production at that time.'®

royalty increase had as one of its purposes the offer of security to new

purchasers of ARCT equipment against the possibility of having to

(footnote continued on following page)

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Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

[686] 6. Information as to royalty rates was communi-

cated between the parties as was their recognition of the

mutual interdependence of their respective royalty pro-

grams.

7. The Leesona patents in suit were known by DMRC

and Chavanoz to be weak and, as they had been advised

by highly qualified patent counsel, they were confident that

these patents could be invalidated. At the same time the

validity of the Chavanoz patents was not in issue. Leesona

feared a showdown and had always settled its patent litiga-

tion short of trial. Insofar as the court is informed, no

American court has held these particular patents valid

after a trial.'’? Nevertheless, DMRC and Chavanoz were

willing to join in a settlement which insured that these

patents of dubious validity as well as their own would be

immune from attack under the licensee estoppel doctrine

which was then the law.

8. The settlement agreement, itself with its cross-

covenants not to sue amounted in effect to the cross-licens-

ing of the Chavanoz and Leesona patents by the two patent

owners who effectively dominated the false twist industry,

and this gave them the power to fix and maintain prices

(footnote continued from preceding page)

pay royalties to Leesona as well as DMRC in the event Leesona won

the suit, but to assume that it escaped the notice of Armitage that

raising DMRC’s royalty rate from 212% to 344% of the manufac-

turer’s list price brought DMRC’s royalty rates into virtual parity

with Leesona’s for all practical purposes would be to ascribe to him

a naivete totally foreign to his character. Actually, an escrow fund

was never established, but after the settlement the increased royalty

rate remained in effect.

17 The decision of the Canadian trial court upholding these patents

would not be controlling in the United States. Ditto, Inc. v. Minne-

sota Mining & Manufacturing Company, 336 F.2d 67, 70 (8th Cir.

1964).

eee ? a EL AT IS

A69

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

in the form of royalties which they consistently exercised

thereafter.'®

9. A misleading press release was prepared by the

parties announcing the settlement to the industry.

10. The conduct of the parties following the settlement

showed their cooperation in adhering to the program of

fixed and stabilized royalty rates and their cooperation in

keeping out competition, That they intended the settlement

to have this effect is manifest on this record.

The court has also concluded that the settlement agree-

ment of March 31, 1964, resulted in monopolization of the

market in the sale and licensing of false twist texturing

machinery, processes and technology by Leesona, DMRC

and Chavanoz in violation of Section 2 of the Sherman

Act. As previously stated, Leesona was the only manu-

facturer in this market when the ARCT machines came

on the scene in 1959, and the Leesona and ARCT machines

almost completely dominated the market for more than

ten years thereafter. DMRC and Chavanoz controlled the

sale of the ARCT machines in the United States, and in

combination with Leesona there is no question that they

possessed monopoly power in the relevant market. Their

intent to monopolize is amply evidenced by their willful

acquisition and maintenance of that power, not as the

result of superior skills, superior products, natural ad-

vantages, business acumen, or the like, but as the result of

barriers erected by their own business methods for the

purpose of foreclosing competition.

IS Tt is interesting that under one of the settlement agreements

between DMRC and Leesona alone DMRC for no additional con-

sideration was granted a license under Leesona’s patents insofar as

they might be applicable to DMRC’s Agilon (edge-crimping) process

(PX 233, Tab B).

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Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

In addition to the foregoing antitrust violations DMRC

and Chavanoz by means of their trade-restraining com-

bination with Leesona have knowingly facilitated the com-

bination between Leesona and other competing manufac-

turers of false twist machines pursuant to licensing agree-

ments which have been held by the Fifth Cireuit to

constitute per se violations of Sections 1 and 2 of the

Sherman Act, Jn Re Yarn Processing Patent Validity Liti-

gation, 541 F.2d 1127 (1976), and by aiding Leesona in

the furtherance of conduct thus held violative of the

Sherman Act DMRC and Chavanoz have themselves vio-

lated the Act.

Defendants’ arguments have been carefully considered

but have been found unpersuasive. It is true that certain

pressures were operating on Leesona which made settle-

ment advisable from its standpoint. It had been engaged

in expensive litigation for seven years and it was facing

formidable, [687] well-financed adversaries. The conten-

tion that the court in which the case was pending was

notoriously unfriendly to patents is hardly worthy of men-

tion, but in any event these several “pressures” could have

been promptly alleviated by the acceptance by Leesona of

the first offer of settlement made by its adversaries: a

judgment declaring Leesona’s patents valid but not in-

fringed.

Assuming the validity of the reasons advanced for

Leesona’s interest in settlement, these same reasons af-

forded an additional cause for DMRC and Chavanoz not

to settle. But it is said that there were various other

pressures operating on these Yefendants, too, among which

were the expense of fighting the suit, the decision of the

Canadian court upholding the Leesona patents, the non-

——OO

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Memorandum Opinion—444 F, Supp. 648 (D.S.C. 1977)

profitability of the DMRC licensing program? and the

burden on sales which the pendency of the litigation created.

The prosecution or defense of litigation is, of course,

expensive, but there is nothing in this record to show that

for either side the point had been reached where ‘‘the

game was not worth the candle.” As has already been

noted, the court is not persuaded that the outcome of the

Canadian case had any appreciable influence on the decision

of DMRC and Chavanoz to settle. The profitability of the

licensing program was dependent on sales of the ARCT

machines, and the fact is that sales were booming at the

time of the settlement.

Had Leesona won the suit, defendants argue, it would

have been ‘‘heaven” for Leesona and ‘‘total disaster”’ for

defendants. The court does not envisage that such dire

consequences would have attended a Leesona victory. Cer-

tainly a judgment limited only to a declaration of the

validity of the Leesona patents would have had no such

effect, and even if coupled with a finding of infringement

of those patents by the ARCT machines, as heretofore

suggested, all would not have been lost.

Although defendants’ arguments are not without logical

appeal, the definite impression still persists that DMRC

and Chavanoz entered into the Whitin litigation confidently

expecting to win it and inflict ‘‘total disaster’’ on Leesona.

As the case wore on it became more and more apparent to

both sides that the results of victory might well be out-

19“*Your Honor will perhaps recall that the licensing program so

far as DMRC was concerned was still in the red and that Roger

Milliken was a man who liked operations which were in the black.”

Defendants’ Closing Argument, Tr. 88, p. 16,877.

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Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

weighed by the possibility of facing unlicensed competition

in the false twist machinery market, a thought epitomized

in Leeson’s statement to Armitage: ‘‘If you win you lose,

and if you lose, you lose—because if the patent is broken,

there will be no royalty’’ (PX 338). This thinking finally

prevailed, and the settlement of March 31, 1964 with its

trade-restraining, anti-competitive results soon followed.

On the question of the impact these results had on the

plaintiffs it is not seriously challenged that unless the

plaintiffs in this action signed the DMRC use license and

paid the required royalties they could not obtain the ARCT

machines which they badly needed in their businesses. The

sizable royalty income collected by DMRC in the years

following the settlement affords graphic proof of the impact

which the program had upon those businesses.”” The court

concludes that as a direct consequence of the violations of

Sections 1 and 2 of the Sherman Act by DMRC and Cha-

vanoz the plaintiffs have been injured in their business and

property within the purview of 15 U.S.C. §15. Zenith

Radio Corporation v. Hazeltine Research, 395 U.S. 100, 113,

89 S.Ct. 1562, 23 L.Ed.2d 129 (1969) ; Response of Carolina,

Inc. v. Leasco Response, a 537 F.2d 1307, 1321 (Sth Cir.

1976). |

20 In its answer to plaintiffs’ interrogatory DMRC listed its royalty

income from the beginning of the program through 1973 as follows

(PX 1062) :

1959 — $ _ 1,000.00 1966 — $ 858,674.79

1960 — 3,406.36 1967 — = 1,337,534.73

1961 — 15,035.02 1968 — 2,032,787.63

1962 — 44,795.49 1969 — 3,329,302.86

1963 — 75,993.74 1970 — __ 1,780,287.64

1964 — 123,302.05 1971 — 874,771.16

1965 — 476,118.90 1972 — 982,639.68

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Memorandum Opinion—444 F.. Supp. 648 (D.S.C. 1977)

[688] B. Liability of DMI.

Plaintiffs seek to hold Deering Milliken, Ine. liable with

respect to the Leesona settlement on the theory that its

wholly owned subsidiary, DMRC, was at all times acting

as its agent or alter ego. DMI strongly resists, contending

that the two companies operated at all times as separate

corporate entities and that DMI’s involvement in the settle-

ment was limited solely to the action of its president and

chief executive officer, Roger Milliken, in arranging for a

meeting between Norman Armitage and Robert Leeson in

which settlement negotiations could be resumed. The court

has concluded that DMI was in fact far more deeply in-

volved and that DMRC’s liability should attach to DMI

under agency principles.

DMRC is the successor corporation to a Massachusetts

trust, Deering Milliken Research Trust, formed in late 1945

by two New England textile mills which were affiliated with

Deering Milliken, Inc. These two mills were later joined

by fifteen or more other textile mills which were selling

through the Deering Milliken organization, the purpose

being to conduct research primarily in the textile field for

the benefit of the member companies of the trust. When

DMRC was formed in 1955, DMI became the owner of all

its issued stock, and it succeeded to the research activities

of the research trust and was thereafter operated for the

benefit of Deering Milliken, Ine. and its subsidiaries.

DMRC owns no real estate, but it has other fixed assets

such as machinery and furniture. Its operating revenue

is obtained through two sources, its licensing programs and

the research work it does for DMI. As late as 1972 the

revenue from its licensing programs had not been sufficient

A74

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

to cover DMRC’s operating expenses. Deficiencies are

made up by DMI. DMRC has never declared a dividend,

but if it did DMI as its sole stockholder would receive the

dividend.

Roger Milliken is the president and chief executive officer

of DMI, a very large, privately-held, diversified textile

manufacturer engaged in a broad range of commercial tex-

tile operations. It employs 22,000 people in sixty-five plants

located throughout the United States and Europe.

Mr. Milliken is a man of exceptional ability and stature,

and in addition to overseeing the operation of his own huge

industrial empire, he holds directorships in several other

industrial and financial institutions of national importance.

Despite the demands on his time which his many outside

activities involve the impression persists that Mr. Milliken

maintains strong personal control over DMI and its sub-

sidiaries, and although he must of necessity rely heavily

on the managing officers of the various subsidiaries, major

decisions are made by him.

The Leesona settlement certainly was such a major deci-

sion, and there is little doubt that Mr. Milliken himself

worked out the basic terms of the agreement which was

eventually signed. Evidence of this is to be found in Armi-

tage’s letter to Leeson of March 3, 1964 (PX 220), the first

paragraph of which read as follows:

“Attached is a draft which I dictated for Roger’s

inspection and primarily to be sure that there was

no misunderstanding between him and me as to his

recollection of his conversation with you. The only

point which I did not include was that which I men-

tioned to you on the telephone this morning, as I felt

A75

Memorandum Opinion—444 F’. Supp. 648 (D.S.C. 1977)

that it was not of sufficient importance to either of

us.”

By contrast, Jerry Cogan, who was DMRC’s executive

vice president at the time of the settlement, and later its

president, testified that he had nothing to do with the settle-

ment and knew nothing about it until after it had been con-

summated. He said that he “assumed” that Armitage had

had the final say-so in the matter but that he did not know.

Cogan said that after he became president of DMRC he

learned for the first time that his company was paying

royalties to Leesona. There is no doubt that Mr. Milliken

oversees his work, Cogan testified, and the person to [689]

whom he reports most regularly and keeps fully advised

as to what he is doing is Mr. Milliken.

At one time DMRC started research in the chemical

field, but when the manufacture of chemicals became a

thriving business, it was transferred by Mr. Milliken from

DMRC and became a separate division of DMI.

In addition to the foregoing findings of fact with respect

to DMRC’s corporate relationship to DMI the court ex-

pressly adopts as its own plaintiffs’ proposed findings of

fact on the antitrust issues Nos. 16.1 to 16.12 inclusive.

It is well settled that the fact that a parent corporation

owns all of the corporate stock of its subsidiary does not

destroy the identity of the latter as a distinct legal entity.

However, where one corporation is so organized and con-

trolled and its business is conducted in such manner as

to make it merely an agency, instrumentality, adjunct or

alter ego of another corporation the separate corporate

existence of the parent and subsidiary may not be recog-

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Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

nized. 18 Am. Jur., Corporations, § 17; Annot., “Liability

of Corporation for Torts of Subsidiary”, 7 A.L.R.3d 1343.

In determining whether there has been such domination

of the finances, policy and practices of the subsidiary that

it has no separate mind, will or existence of its own but

is simply a business conduit for the parent corporation

various factors may be considered among which are the

following:

1. Common stock ownership.

2. Common directors or officers.

3. Financing of the subsidiary by the parent.

4. Incorporation of the subsidiary by the parent.

5. Gross inadequacy of capital for the subsidiary.

6. Payment by the parent of the salaries and other

expenses or losses of the subsidiary.

7. The subsidiary has substantially no business except

with the parent and no assets except those conveyed to it by

the parent.

8. The parent uses the subsidiary’s property as its own.

9. The executives of the subsidiary do not act inde-

pendently but take their orders from the parent corpora-

tion in the latter’s interest.

Bay Sound Transportation Company v. United States, 350

F.Supp. 420, 426 (S.D.Tex.1972), aff'd, 474 F.2d 1397 (5th

Cir. 1973).

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Memorandum Opinion—444 F.. Supp. 648 (D.S.C. 1977)

Most, if not all, of these factors are present here, and

the conclusion is that DMRC was so dominated by DMI

through its president and chief executive officer, Roger

Milliken, in the conduct of its business that it must be

held to have been merely an agency and instrumentality

of its parent corporation in the transactions which led

to the settlement of the Leesona litigation. Accordingly,

liability for the resulting antitrust violations found to

have been involved in the settlement must attach to DMI.”!

C. Liability of ARCT-France and ARCT, Inc.

Plaintiffs’ efforts to impose liability on ARCT-France

and ARCT, Inc. have been directed primarily toward asso-

ciating these two defendants with the alleged vertical anti-

trust conspiracy, now rejected by the court as a basis for

liability, but as a signatory to the Leesona settlement

ARCT-France is also charged with lability as a member

of the conspiracy engendered by that agreement. ARCT,

Ine. which did not come into existence until almost two

years after the settlement is sought to be charged as a

late joiner of the conspiracy. The [690] court has con-

cluded that these charges are not substantiated by a pre-

ponderance of the evidence as to either defendant.

In reaching this conclusion the court has considered

carefully the relationships between the alleged conspirators

and the marked differences between their interests. Nor-

21 Plaintiffs also advance the argument that DMI by its own actions

“facilitated the combination among defendants and their combination

with Leesona” and should therefore be liable for its own participation

in the settlement. The conclusion that DMRC’s actions are imputable

to DMI under traditional agency principles makes it unnecessary to

consider this somewhat novel theory of liability.

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Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

mally the participants in an antitrust violation derive their

benefits from the same source. Price fixers, for instance,

profit from non-competition in pricing. Following the

settlement here, however, the sole source of profit for

Whitin and ARCT, Inc. continued to be the sale of false

twist machinery in open competition with their alleged

co-conspirator, Leesona, while Chavanoz and DMRC con-

tinued to profit from their production royalty program,

freed by the settlement agreement of any threat from

Leesona. Likewise the conspiracy of Leesona, DMRC and

Chavanoz to monopolize the false twist machinery market

did not inure to the benefit of ARCT-France, Whitin or

ARCT, Ine. It may in fact have resulted in some competi-

tive disadvantage for them, for as new entrants in the

market came on the scene they invariably came under

Leesona’s licensing program for manufacturers and thereby

qualified to participate in Leesona’s production royalty

program to the extent of one-third of the royalties col-

lected, a windfall never enjoyed by Whitin, ARCT-France

or ARCT, Inc.

Given this divergence between the interests of the ARCT

defendants and their alleged co-conspirators, it is not sur-

prising that the relationship between ARCT-France and

DMRC was fraught with some friction and antagonism al-

most from the beginning. As early as March, 1961, we find

Crouzet writing to Soep.

“T have told you several times that the presence

of DMRC in the arrangements entered into in the

United States constitutes a hinderance to us.” (PX

1306)

A few months later Waters on his return from a visit to

Europe reported to his superiors that Crouzet was “willing

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Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

to reimburse DMRC now for out of pocket expenses if

DMRC will allow the agreement to be cancelled at this

time.”

The relationship between DMRC and Waters and his

employers continued to deteriorate, culminating at last in

a letter by Armitage to Soep shortly after the formation

of ARCT, Ine. in February, 1966, in which he disparaged

Waters and questioned the wisdom of the formation of this

new company to distribute the ARCT machines in the

United States.

When the fact that ARCT and Whitin were to enjoy

none of the fruits of the conspiracy (that is, participation

in production royalties or freedom from competition in

machine sales) is considered in the light of the strained

relationship which existed between them and DMRC, the

court regards it as highly unlikely that these two com-

panies would have knowingly entered into a conspiracy with

DMRC, Chavanoz and Leesona to violate the antitrust laws.

It is even more unlikely that Waters would have knowingly

permitted his new company, ARCT, Inc., to join in the eon-

spiracy when it was incorporated two years later.2? On the

contrary the court is persuaded that in entering into the

settlement Whitin and ARCT-France were motivated solely

by their desire to sell machines in the United States free

from the prospect that their customers might later be faced

22 Waters was in charge of the false twist machinery sales for

Whitin but was not a part of management, and although he attended

two meetings at which unproductive settlement negotiation discus-

sions occurred, there is no evidence that he had any part in the final

negotiations which resulted in settlement or that he understood the

anti-competitive import of the agreements finally reached. Thus it

cannot be said that he brought with him to ARCT, Inc. any guilty

knowledge of the conspiracy. See United States v. Wilshire Oil

Company, 427 F.2d 969 (10th Cir. 1970).

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Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

with the necessity of paying production royalties both to

Leesona and DMRC.

The fact that ARCT-France was actually a party to the

Leesona settlement agreements is regarded as having little

probative force. It was not a party to the United States

litigation bat was, of course, involved in litigation in France

which the settlement encompassed. It was represented

[691] here by Leo Soep, the ubiquitous “conseil en brevets”,

who signed the agreement for ARCT-France as attorney-in-

fact. Soep also signed for Chavanoz for whom he had been

the chief negotiator. There is no evidence that Henri

Crouzet, ARCT-France’s president and chief executive

officer, had any part in the negotiations. His limited skill

in English makes it unlikely that he had sufficient under-

standing of the proceedings in the United States to form

any intent concerning a conspiracy.

Moreover, Soep’s guilty knowledge and intent, if any,

were not necessarily imputable to ARCT-France, for his

primary allegiance for years had been to Chavanoz and in

this instance he was in a conflict of interest situation.

Chavanoz’s sole interest in the settlement was to preserve

the production royalty program. On the other hand, ARCT-

France’s sole interest was in selling machines, an endeavor

for which the DMRC-Chavanoz licensing program posed a

constant impediment.

The conclusion is that the requisite intent to violate the

antitrust laws on the part of ARCT-France in entering into

the Leesona settlement agreement and its actions subse-

quent thereto have not been made to appear by a prepon-

derance of the evidence. United Siates v. Singer Manu-

facturing Company, 374 U.S. 174, 83 S.Ct. 1778, 10 L.Ed.2d

823 (1963); The Duplan Corporation, et al. v. Deering

Milliken, Incorporated, et al., 540 F.2d 1215 (4th Cir. 1976).

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Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

Similarly proof is lacking that ARCT, Inc. knew of the

existence of the conspiracy and consciously committed

itself to the common scheme with intent to pursue its objec-

tives. Industrial Building Materials, Inc. v. Interchemical

Corporation, 437 F.2d 1336 (9th Cir. 1970); United States

v. Standard Oil Company, 316 F.2d 884 (7th Cir. 1963);

Jones v. United States, 251 F.2d 288 (10th Cir. 1958). As to

each of these defendants’ evidence is lacking that there

was a common purpose and uniformity of conduct be-

tween them and their co-defendants. Theatre Enterprises,

Inc. v. Paramount Film Distributing Corporation, 201 F.2d

306 (4th Cir. 1953), aff'd, 346 U.S. 537, 74 S.Ct. 257, 98

L.Ed. 273 (1954). It follows that ARCT-France and ARCT,

Ine. are not liable to the plaintiffs as participants in the

horizontal conspiracy.

III. Statute of Limitations.

As an affirmative defense to the antitrust charges growing

out of the Leesona settlement DMRC, Chavanoz and DMI

have pleaded the bar of the four-year statute of limitations

provided for in Section 4B of the Clayton Act, 15 U.S.C.

§ 15b, which reads as follows:

“Any action to enforce any cause of action under

sections 15, 15a, or 15e of this title shall be forever

barred unless commenced within four years after the

cause of action accrued.”

Defendants contend that the settlement of March 31, 1964

received wide press coverage at the time and was well

known throughout the industry. Also well known was the

fact that DMRC had obtained the opinion of counsel prior

to the settlement that Leesona’s false twist patents should

be invalidated. In these circumstances, defendants argue,

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Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

any cause of action based upon the settlement (which was

actually consummated sometime in April of 1964) was

barred after April, 1968. Since the earliest pleading here

involved which asserted a claim regarding the 1964 settle-

ment was Duplan’s complaint filed in November of 1969,

defendants assert that that action and all others which were

filed later making the same claim are barred by the four-

year statute of limitations.

Plaintiffs on the other hand contend that defendants

committed overt acts in pursuance of the conspiracy grow-

ing out of the Leesona settlement which continued down

through the date of the filing of the Duplan suit including

the continued unlawful collection of royalties and that a

new cause of action accrued upon the commission of each

such overt act. Plaintiffs argue, therefore, that they are

entitled to recover all damages attributable to these unlaw-

ful acts which occurred during the four years prior to the

institution of suit.

[692] While the defendants’ position is not without some

supporting authority,” decision here must be in conformity

with the principle stated by the Supreme Court in Zenith

Radio Corporation v. Hazeltine Research, Inc., 401 U.S.

321, 338, 91 S.Ct. 795, 806, 28 L.Ed.2d 77 (1971):

“The basic rule is that damages are recoverable

under the federal antitrust acts only if suit therefor

23 The cases are collected in an annotation in 62 A.L.R.2d 1369,

where the annotator makes this interesting observation :

“The cases involving the running of limitations against so-

called civil actions for conspiracy present a melange of in-

consistent, irreconcilable, even contradictory statements of

general ‘rules’ relating to the subject. This is, perhaps, not

surprising in view of the vague, poorly defined scope of this

kind of civil suit.” Jd. at 1385.

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Memorandum Opinion—444 F, Supp. 648 (D.S.C. 1977)

is ‘commenced within four years after the cause of

action accrued,’ 15 U.S.C. § 15b, plus any additional

number of years during which the statute of limita-

tions was tolled. Generally, a cause of action accrues

and the statute begins to run when a defendant

commits an act that injures a plaintiff’s business.

(Citing cases.) This much is plain from the treble-

damage statute itself. 15 U.S.C. § 15.”

The Supreme Court had applied this general rule three

years earlier in Hanover Shoe, Inc. v. United Shoe Ma-

chinery Corporation, 392 U.S. 481, 88 S.Ct. 2224, 20 L.Ed.2d

1231 (1968). In that case a shoe manufacturer sued the

manufacturer of shoe machinery in 1955 alleging a viola-

tion of Section 2 of the Sherman Act dating back to 1912

when defendant instituted its policy of leasing rather than

selling its shoe machinery to the plaintiff and other shoe

manufacturers. In the Supreme Court the defendant argued

that because the earliest impact of its lease only policy

occurred in 1912 the plaintiff’s cause of action arose during

that year and was therefore barred by the applicable statute

of limitations. In rejecting this argument the Supreme

Court said:

“We are not dealing with a violation which, if it

occurs at all, must occur within some specific and

limited time span. ... Rather, we are dealing with

conduct which constituted a continuing violation of

the Sherman Act and which inflicted continuing and

accumulating harm on Hanover, Although Han-

over could have sued in 1912 for the injury then

being inflicted, it was equally entitled to sue in

1955.” Id., Footnote 15, 392 U.S. at 502, 88 S.Ct. at

2236.

These principles have been consistently followed in this

circuit, Charlotte Telecasters, Inc. v. Jefferson-Pilot, 546

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Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

F.2d 570 (4th Cir. 1976); Blackwelder v. Millman, 522 F.2d

766 (4th Cir. 1975); Railing v. United Mine Workers, 445

F.2d 353 (4th Cir. 1971), and in other circuits, Twin City

Sportservice, Inc. v. Charles O. Finley € Company, 512 F.2d

1264 (9th Cir. 1975); Baker v. F' & F Investment, 420 F.2d

1191 (7th Cir. 1970). In a decision rendered since the trial

of the case at bar the Fifth Cireuit on facts quite similar

to those involved here has held that an antitrust cause of

action continues to acerue so long as a defendant continues

to accept benefits under or assert the validity of a contract

entered into in violation of the antitrust laws. Zmperial

Point Colonnades Condominium v. Mangurian, 549 F.2d

1029 (5th Cir. 1977).44 Distriet courts have reached the

same result. Schokbeton Products Corporation v. Exposaic

Industries, Inc., 308 F.Supp. 1366 (N.D.Ga.1969).

In this ease DMRC/Chavanoz and Leesona continued to

maintain their respective licensing programs and to collect

fixed production royalties from the plaintiffs up to and

after the filing by plaintiffs of their antitrust actions herein,

and these and other overt acts committed by the defendants

within the four-year period preceding the institution of the

actions created rew causes of action in favor of the plain-

tiffs which are not time-barred.

Additionally, defendants’ plea of the statute of limita-

tions must be rejected on the theory most recently recog-

nized in this circuit in Charlotte Telecasters, supra, [693]

that a cause of action does not accrue for purposes of

the four-year statute of limitations as to future damages

which are speculative and essentially unprovable. Because

of the uncertainties in the false twist yarn industry in

234 Followed in Spitz v. Buchwald, 551 F.2d 1051 (Sth Cir.,

decided May 9, 1977).

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Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

1964 and 1965 and the enormous growth and change in

character of false twist yarn consumption which occurred

Within the four years next preceding the filing of these suits

it would have been impossible for the plaintiffs to prove

with any reasonable degree of accuracy their future dam-

ages had these actions been instituted within four years

from the 1964 settlement.

The defendants’ plea of the statute of limitations is re-

jected with respect to all damages which plaintiffs may

show have been sustained within four years preceding their

suits resulting solely from acts of the defendants committed

during the four-year period.

II.

THE PATENT MISUSE ISSUES

In this section of the memorandum it will be assumed

that no antitrust violations have been shown and that the

Chavanoz patents remaining in the suit are valid. The

question for decision is whether the DMRC licensing pro-

gram as implemented through the use of its standard

licensing agreement violated the doctrine of misuse of

patents.

*4In view of the inordinate amount of time required to try and

decide these complex cases the court has deemed it appropriate to

decide all the issues involved in the trial notwithstanding the previous

finding of antitrust liability on the part of DMRC, DMI and Chava-

noz might well be regarded as mooting the patent misuse, validity and

infringement issues. In this way it is hoped that decision on appeal

may be final as to all liability issues.

*5 For a critical analysis of the misuse doctrine see Niconsin, ‘‘Mis-

use of the Misuse Doctrine in Infringement Suits”, 9 UCLA Law

Review 76 (1962). See also Wallace, “Proper Use of Misuse Doc-

trine’, 26 Mercer Law Review 813 (1975), where it is said:

“The frequent jest that the massive financial and time bur-

dens of complex patent litigation result in everybody’s loss

except the lawyer’s may not be far from the truth.”

AS86

Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

The Licensing Agreement

The essential provisions of the standard DMRC licensing

agreement are set forth on pages 14-17 supra. Briefly it

purports to grant to the licensee a non-exclusive and non-

transferrable right to use the “FT Processes” and “FT

Machines”. “FT Processes” are defined in the preamble as

“technical information relating to processes for the manu-

facture of crimped synthetic yarns based upon the appli-

cation of a false twist.” “FT Machines” are defined as

“certain inventions and technical information relating to

... devices for the manufacture of crimped synthetic yarns

based upon the application of a false twist.” The “inven-

tions” were said to be described in United States patents

and patent applications and to be listed in Appendix A

attached to the license. In practice this Appendix A was

rarely, if ever, attached. As previously noted, just what

the term “technical information” encompassed is not made

clear by the licensing agreement (see Footnote 8, page 673,

supra).

In the spring and summer of 1961 one of the Throwsters

through its attorney, one Charles A. McClure of Phiiadel-

phia, engaged in an extended exchange of correspondence

with Armitage of DMRC (PX 215 and PX 410) in an effort

to obtain more definite information as to what the license

covered and how the royalty payment related to the various

items in the patent package including “technical informa-

tion”. In his letter of April 17, 1961, McClure wrote:

26 Paragraph 2 of the agreement recites that ““DMRC has already

furnished to licensee certain technical information relative tc the

present inventions which licensee acknowledges”, but there is no

evidence that DMRC actually furnished its licensees with anything

except the license form to be signed and returned. The licensee was

entitled, however, to send its engineers or other personnel “to DMRC

or its designee” for the purpose of obtaining instructions in the

practice of the inventions.

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Memorandum Opinion—444 F. Supp. 648 (D.S.C. 1977)

[694] “[I]t appears to be the intention to collect

royalties regardless of whether the conversion [of

crimped yarn] involves practice of an invention

covered by a licensed patent or patent application.

In my opinion, the running royalty should be based

only upon the latter, especially in view of the pro-

vision for a minimum annual royalty, which itself

should be ample recompense for whatever unpatent-

able technical information might be received by my

client from your company.”

In his reply dated April 22, 1961, Armitage said he could

not agree. On the contrary, he continued,

“The machine itself contains structural and fune-

tional elements, some of which are subject of patents

and patent applications and some of which are

included in the technical information which is made

available to the purchaser of the machine, and this

also applies to the process under which the licensee

is licensed. As far as the machine is concerned,

ARCT, the licensed manufacturer, is not permitted

to make available such embodiments of the technical

information except to licensees for their use. For

this reason the use licensee may well consider that

the cost to him of a machine with this right to use

it is the original purchase price plus the continuing

royalty. Your suggestion that the minimum annual

royalty would be ample recompense for technical

information is not a realistic one, because this would

amount to only $5,000 total for the minimum period

of five years. This is not a minimum for each machine

but for all the machines which the licensee buys, and

it would not begin to pay what it has already cost

us to develop only the information upon the effect

of variables in machine settings upon yarn properties

which we have had to earry out for the American

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Memorandum Opinion—444 F, Supp. 648 (D.S.C. 1977)

yarns which our licensees will be using. As a matter

of fact, you will realize from our own correspondence

that just the cost of negotiating this agreement will

absorb a generous fraction of the minimum!”

‘The royalty rate, at first two and one-half per cent and

later three and one-half per cent “of the manufacturer’s list

price of the raw yarn... which is converted to crimped

yarn by licensee according to the 'T process or FT ma-

chines”, remained constant regardless of the nonapplica-

bility of some of the Chavanoz patents in the package to

the machines. DMRC knew, or should have known from

the beginning of the licensing program that many of the

patents included in the package were not applicable to any

ARCT machine.?’

The original licens

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