Petition — Shapiro v. General Motors Corp.

Sifice-Sunreme Court, U.S.

FIL‘E D

80-1405

i 6s FEB soA9 198)

ALEXANDE. L. STEVAS,

RIX

areres

No. >

IN THE

Supreme Court of the United States.

OcTOBER TERM, 1980.

NELSON H. SHAPIRO anp RICHARD G. BOARD,

PETITIONERS,

v.

GENERAL MOTORS CORPORATION aAnp

FORD MOTOR COMPANY,

RESPONDENTS.

Petition for a Writ of Certiorari to the United States

Court of Appeals for the Fourth Circuit.

ROBERT H. RINEs,

RINES AND RINES,

10 Post Office Square,

Boston, Massachusetts 02109.

(617) 482-3289

Of Counsel:

NANCY RICHARDS-STOWER, ESQUIRE

RINES AND RINES

RE ENA IO EER IT TEE HE TERE OCR TE OEE TE EEL RTA TATE

ADDISON ©. GETCHELL & SON, INC. - THE LAWYERS’ PRINTER - BOSTON

Questions Presented.

1. Are inventors trading in the licensing and sale of their

inventions, designs and know-how, constitutionally ex-

cludable as a class from the protection of the antitrust laws

against unlawful restraint and monopolization in such

trading, because they hold a patent for one of their inven-

tions?

2. Are individual and parallel common practices of General

Motors and Ford with common automotive part suppliers to

control and share the parts market and all inventions and

developments therein, violative of the antitrust laws?

il

Table of Contents.

Opinions below

Jurisdiction

Constitutional and statutory provisions involved

Statement of the case

A.

B.

C.

D.

Nature of the case

The nature of the products and marketing

arrangements involved in this litigation

Facts found by the District Court

The District Court’s conclusions of law

Reasons for granting the writ

I.

Prompt resolution of the constitutionality of de-

priving independent inventors of standing under

the antitrust laws to challenge unlawful re-

straints and monopolization in their trade is of

vital importance

II. It is also of extreme importance to resolve

whether a shared monopoly or restraint of trade

resulting from conscious parallelism of the

market activities of economic giants is violative

of the antitrust laws

Conclusion

Appendix A

Appendix B

bo

te

ill

Table of Authorities Cited.

CASES.

In re Multidistrict Vehicle Air Pollution M.D.L.

No. 31, 481 F. 2d 122 (9th Cir. 1973), cert. denied

sub nom. Morgan v. Automobile Manufacturers

Assn., Ine., 414 U.S. 1045 (1973)

Midway Enterprises, Inc. v. Petroleum Marketing

Corp., 375 F. Supp. 1339 (D. Md. 1974)

South Carolina Council of Milk Producers, Inc. v.

Newton, 360 F. 2d 414 (4th Cir. 1966), cert. denied,

385 U.S. 934 (1966)

Theatre Enterprises, Inc. v. Paramount Film

Distributing Corp., 346 U.S. 537 (1954)

CONSTITUTIONAL PROVISIONS.

United States Constitution, Amendment 5

STATUTES.

I5U.S.C.91 A &

15 U.S.C. §2 |

15 U.S.C. § 15

15 U.S.C. § 26

28 U.S.C. § 1254(1)

MISCELLANEOUS.

Fed. R. Civ. P. 56(d)

bo

13

11

11

iw

No.

IN THE

Supreme Court of the United States.

OCTOBER TERM, 1980.

NELSON H. SHAPIRO anp RICHARD G. BOARD,

PETITIONERS,

VU.

GENERAL MOTORS CORPORATION anp

FORD MOTOR COMPANY,

RESPONDENTS.

Petition for a Writ of Certiorari to the United States

Court of Appeals for the Fourth Circuit.

To the Honorable, the Chief Justice, and the Associate

Justices of the Supreme Court of the United States:

Nelson H. Shapiro and Richard G. Board, your petitioners,

pray that a writ of certiorari issue to review the decision of

the United States Court of Appeals for the Fourth Circuit

entered in this case on November 21, 1980.

Opinions Below.

The opinion of the United States Court of Appeals for the

Fourth Circuit is reproduced as Appendix A, /n/ra, pp.

Al-A2. That per curiam opinion affirms a decision of the

”)

United States District Court for the District of Maryland (Ap-

pendix B, infra, pp. B1-B56), reported at 472 F. Supp. 636

(1979).

Jurisdiction.

The judgment of the Court of Appeals for the Fourth Cir-

cuit (App. Al-A2) was entered on November 21, 1980, and

this Court’s jurisdiction is invoked under 28 U.S.C. § 1254(1).

Constitutional and Statutory Provisions Involved.

Constitution of the United States.

Fifth Amendment:

‘No person shall ... be deprived of life, liberty, or

property, without due process of law..

Statutes.

15 U.S.C. § 1 (Sherman Act):

“Every contract, combination ... or conspiracy, in

restraint of trade or commerce among the several States

. Is hereby declared to be illegal... .”’

15 U.S.C. § 2:

“Every person who shall monopolize, or attempt to

monopolize, or combine ... with any other person or

persons, to monopolize any part of the trade or com-

merce among the several States ... shall be deemed

guilty of a felony... .”’

15 U.S.C. § 15 (Clayton Act):

‘Any person who shall be injured in his business or

property by reason of anything forbidden in the antitrust

laws may sue therefor... .”

15 U.S.C. § 26:

“Any person ... shall be entitled to sue for and have

injunctive relief ... against threatened loss or damage

by a violation of the antitrust laws... .”

3

Statement of the Case.

A. NATURE OF THE CASE.

This petition is concerned with a count for antitrust viola-

tion based upon the injury to petitioners’ (plaintiffs) business

of inventing and trading in automotive seat belt inventions

and patent rights, and caused by the anticompetitive pur-

chasing policies of respondents (defendants) in combination

with defendants’ suppliers of seat belt equipment.

The core of the alleged violation is defendants’ policy, en-

forced by their individual economic power and by a conscious

parallelism of practice, and in deliberate combination with

their suppliers (some common to both defendants), to de-

mand, as a condition of doing business with defendants, an

absolute royalty-free right to make, use and sell all inventions

utilized in automotive equipment purchased by defendants

from their suppliers, and the defendants’ general refusal to

pay for outside inventions. The stifling effect of defendants’

purchasing policies made it impossible for plaintiffs, as well

as other independent inventors who had previously supplied

the automotive market, to compete in the market for

automotive equipment innovation; resulted in severe injury

to plaintiffs’ inventing business and property; and ultimately

foreclosed plaintiffs entirely from the marketplace for in-

novation in automotive equipment.

An unusual aspect of this litigation is its disposition on sum-

mary judgment proceedings. Since copious discovery, in-

cluding depositions of defendants’ witnesses and documen-

tary evidence, patently proved the existence of the

complained-of policy and other salient facts underlying plain-

tiffs’ claim, it appeared appropriate to test the issue of law

applicable to that policy by way of plaintiffs’ motion for par-

tial summary judgment, which also requested the court to

4

make findings of fact not in controversy under Rule 56(d) of

the Federal Rules of Civil Procedure, as an aid to subsequent

trial.

The defendants concurred that there was sufficient factual

evidence not in dispute as to which legal conclusions could be

reached, and countered with their respective motions but for

total summary judgment, which plaintiffs contested as inap-

propriate.

The lower court, after copious briefs and extended oral

arguments, rendered a decision which involved two distinct

parts. First, in a section headed “I. The Facts,’ the court

made findings of facts, based on the adduced evidence. Sec-

ond, in a highly speculative and argumentative part of the

decision, chock full of inferences and hypotheses, and largely

unsupported by any evidence of record, the court evolved a

new and erroneous proposition of law, namely, that because

plaintiffs had obtained a patent on one of their inventions,

here applicable against only one defendant (General Motors),

they are barred from having standing under the antitrust

laws, even as to the whole family of other inventions and seat

belt technology and trade secrets that plaintiffs were

prevented from marketing in the automotive industry by the

deliberate policies of both defendants in consort with their

captive suppliers, some common to both defendants.

Though the District Court had characterized this case as

presenting ‘‘several fascinating issues of antitrust-patent

litigation,’ and evolved new law for its decision, the Court of

Appeals for the Fourth Circuit unfortunately chose to issue a

very prompt per curiam affirmance, as if there were no

‘fascinating issues.” Thus, it is the action of the lower court

that is here under review.

5

B. Tut NATURE OF THE PRODUCTS AND MARKETING

ARRANGEMENTS INVOLVED IN THIS LITIGATION.

Since the lower court’s decision apparently starts with the

premise that undisputed facts concerning the nature of the

products and the way in which they come to the automotive

market are known, a brief introductory summary as to this

subject matter may be helpful.

The American automobile is manufactured by four large

companies, two of which—defendants General Motors and

Ford—are among the largest corporations in the world.

Together, defendants account for nearly three-quarters of

the new cars produced in this country.

Original automotive equipment for domestically produced

cars, i.e., parts and supplies used by American automobile

manufacturers in the production of new cars, comes from two

principal sourees—equipment manufactured in-house by the

automobile manufacturers themselves, and equipment

manufactured by a large number of suppliers with whom the

automobile companies deal.? In theory, the suppliers are

separate business entities, independent of the automobile

manufacturers; in practice, however, the suppliers serve as

captive job shops, largely dependent upon the business needs

and policies of their automobile-manufacturing customers.

The automobile manufacturers, as the final arbiters of the

equipment included in the cars they make, even decide what

' Stewart Dep., at 17-19. Since there was no trial, references will

be made to the documentary evidence in the summary judgment

proceedings, the Joint Appendix in the Court of Appeals, and Ap-

pendices A and B of this petition for factual verification by this

Court.

* West Dep., at 26-27; Shapiro Dep., at 497; and Hedeen Dep., at

6, 17, 18.

6

automotive innovations their dealers may sell and what

automotive innovations the public may buy.*

Innovation in the original automotive equipment market

has historically had three competing sources—the in-house

research and engineering staffs of the automobile manufac-

turers, the researchers and engineers employed by the sup-

pliers, and independent inventors such as plaintiffs who

license the suppliers and/or manufacturers.

The inventions and automotive parts involved in this litiga-

tion are seat belts, or safety belts as they are sometimes

called, with automatic retractors.

The demand for innovation in such equipment in the United

States is limited to the defendants and competing automobile

manufacturers, who have only a small share of the market.

The world’s largest customer of seat belt equipment, indeed,

is the Fisher Body Division of General Motors.’ Together,

General Motors and Ford account for three-quarters of the

demand for seat belt equipment installed in new American

made cars.5 Except for approximately 30% of General

Motors’ seat belt needs which it now fills in-house," a few sup-

pliers fill the entire needs of the defendants for this equip-

ment, with some suppliers shared in common by both defend-

ants.’ In the market for seat belt equipment and innovations

relating to such equipment, these suppliers are totally de-

pendent upon their giant customers, the defendants.

* General Motors Admissions 5, 6, 7, 10; Desmarais Dep., at 13,

14.

‘ Fisher Dep., at 94.

* General Motors Answer to Request for Admission 4.

° Hedeen Dep., at 45-46.

‘ Firestone Tire and Rubber Company (which absorbed a former

supplier Hamill Manufacturing Company) and Allied Chemical

Company (which absorbed a former supplier Jim Robbins Seat Belt

Company).

7

Although guided by standards established by the federal

government for automotive safety equipment, the defend-

ants decide upon the particular designs of seat belt equip-

ment which they will purchase from their suppliers.®

Defendants decide what share of the market for such equip-

ment each supplier will have. Defendants dictate the prices

paid to each supplier,? and thus, indirectly at least, determine

the profits to be made by each supplier.!°

Defendants insist upon owning the tools used by their sup-

pliers to manufacture the seat belt equipment.!!

The extent of parallelism between the purchasing policies

of defendants is striking and conscious:

1. Both General Motors and Ford employ essentially the

same seat belt technology and designs. !”

2. Both General Motors and Ford have policies that en-

sure multiple-sourcing of seat belts without any pay-

ment of royalties by General Motors or Ford."

3. General Motors and Ford have seat belt suppliers that

supply both of them.!4

4. Both General Motors and Ford own the tools used by

their suppliers in the manufacture of seat belts for

them, and sometimes General Motors-owned tools are

used to manufacture Ford seat belt equipment and

"nn ‘ 2 15

VICe-VeETSA,

* Hedeen Dep., at 14-15.

* Joint App. 267-268; 269; 251.

'° Joint App. 267-268; 269; 251.

'! Joint App. 261-263; 270-271; 251.

'2 Desmarais Dep., at 59; Joint App. 162-164.

'S Joint App. 269; 275; 248-249.

'§ Cook Dep., at 44; Joint App. 38-40.

' Cook Dep., at 17 and 24 (Joint App. 263, in part); Joint App.

250.

~)

8

Both General Motors and Ford /imit the market

shares of their seat belt suppliers."

Both General Motors and Ford fix the prices that they

pay to their seat belt suppliers.!7

. Both General Motors and Ford use their tool owner-

ship as pricing leverage on their seat belt suppliers. !8

. Both General Motors and Ford use backward integra-

tion to keep their seat belt suppliers in line.'

Both General Motors and Ford restrict the choice of

their retail automobile dealers in the purchase of seat

belts.2°

Using the same economic power techniques, the defend-

ants, on pain of refusing business, are thus able to compel

suppliers owning or licensing inventions from others to grant

royalty-free licenses to defendants and their designees.2!

C. Facts Founp BY THE District Court.

The lower court correctly found that the defendants’ de-

mand for royalty-free rights to all inventions used by their

suppliers as a condition to receiving defendants’ business.

has made it impossible for inventors, such as plaintiffs, to

compete in the business of selling inventions in the market

for automotive innovation.

Specifically, the court found that:

‘In exchange for a supplier’s receiving a certain share of

a car manufacturer’s business for a given input, the sup-

'6 Joint App. 38-40; 266; 269.

7 Joint App. 251; 267-268.

'8 Joint App. 251; 270-272.

9 Joint App. 102-103; 113-160.

° General Motors Admissions 5, 6, 7, 10; Desmarais Dep., at

13-14.

21 Joint App. 38-40.

9

plier must sign an agreement releasing the car manufac-

turer from having to pay any item-by-item royalties on

the patented products made by the supplier. The obvious

effect of such a policy, regardless of whether it is devised

to guarantee a steady supply or for other reasons, is fu

reduce to zero the royalties which the inventors eventual-

ly receive. In other words, from a purely competitive

standpoint, a licensee-supplier could not expect to re-

main in business very long if he agreed to pay royalties

to inventors where his competitors did not agree, in ef-

fect, to cut their own profits by likewise paying

royalties.” (Emphasis added.)

Indeed, the lower court did not overstate the “zero

royalty” plight of the outside inventors who in the past had

contributed so significantly to the automotive industry. The

agreements with the suppliers went much further than just

requiring “zero royalty” on the inventions being used. The

agreements demanded free rights not only us to eristing per-

tinent inventions, but even free rights as to all yet unborn,

suture inventions, all for the privilege of doing business with

the defendants For example, one agreement required:

“2 .. a royalty-free, non-exclusive, worldwide license |. .

under any and all United States and foreign inventions,

patents and patent applications which are now owned «or

at any time hereafter may be owned or controlled by

Hamill [a supplier} or under which Hamill has or shall

have the right to grant licenses. . . 2° (Emphasis added.)

Another agreement required:

22 App. B, p. B2.

** Hamill license to Ford (Joint App. 42-43).

10

a royalty-free license under all patents which [the

supplier] now owns, or may come to own during the life of

this agreement... .24 (Emphasis added.)

Since the inventor’s customer—the potential licensee who

supplies the defendants—could not, in the lower court's

words, “expect to remain in business very long if he agreed

to pay royalties to inventors where his competitors did not,”’

independent inventors, such as plaintiffs, have been forced

out of the business of inventing in the automotive market,

leaving that function to the monopoly of defendants and their

suppliers. Independent inventors, such as plaintiffs, whose

very business requires that they make their living by selling

and licensing their designs, know-how, and _ inventions

(patented or unpatented), cannot receive “zero royalties” on

their present inventions, let alone agree in advance to receive

‘zero royalties” on all their future inventions, and still re-

main in business.

The lower court then proceeded to show plaintiffs’ dilem-

ma, finding in connection with licensing neyotiations with

one seat belt supplier, that the supplier (Hamill) ‘‘finally told

plaintiffs that it would be economically unfeasible ... to pay

plaintiffs’ royalties, because Hamill would be operating at a

competitive disadvantage vis-a-vis non-royalty paying second

source licensees designated by Ford and GM."’*5

D. THe District Court's CONCLUSIONS OF LAW.

Turning first to the matter of standing to bring his litiga-

tion under the antitrust laws, the District Court ayreed with

plaintiffs that ‘‘the suppliers are not being hurt ...’'%% by

24 Original license agreement from Robbins to Irving, re: General

Motors, Joint App. 62.

“5 App. B, p. B3.

26 Arp. B, p. B25.

1]

these policies since they get a guaranteed share of defend-

ants’ business. The only persons thereby injured are plain-

‘iffs and other outside inventors, who are the targets for in-

jury and thus have standing to challenge these practices.

South Carolina Council of Milk Producers, Inc. v. Newton,

360 F. 2d 414, 418 (4th Cir.), cert. denied, 385 U.S. 934

(1966).

The District Court also stated that the case of Midway

Enterprises, Inc. v. Petroleum Marketing Corp., 375 F. Supp.

1339 (D. Md. 1974), ‘‘ ‘would appear to provide support for

plaintiffs’ standing arguments.’ 2?

But instead of holding that plaintiffs had standing, the

lower court evolved what appears to be a wholly new princi-

ple of law that, since plaintiffs hold a patent for one of their

many seat belt designs now asserted against only one defend-

ant, they should have no standing to complain under the an-

titrust laws of anticompetitive policies of defendants in the

trade of inventing and licensing. In the words of the court:

“Given the protections already afforded plaintiffs by the

patent laws, granting them standing would enable them

to obtain benefits far beyond those provided by law. By

virtue of their patent monopoly, they are free to

negotiate whatever price they can obtain for their inven-

tion; however, they cannot invoke the antitrust laws to

guarantee that such a return, if any, approximates even

their minimum expectations.’’”8

‘*.. [T]he standing requirements must be narrowly con-

strued especially in view of the fact that the patent

aspects of this case remove it from the straightforward

4

analysis of standing involved in pure antitrust cases.’’*!

27 App. B, p. B40.

28 App. B, p. B56.

29 App. B, p. B50.

12

Secondly, while acknowledging evidence of parallelism of

these policies by defendants, and finding that plaintiffs

‘‘presented considerable evidence establishing that Ford

and GM insisted that their suppliers agree to the royalty-

free paid up license provisions,’’*°

the lower court held that since no ‘‘corspiracy between the

automakers” had yet been shown, this did not fall under pro-

hibitions of the Sherman Act. The court refused to consider

conscious parallelism or shared monopoly as a basis for an-

titrust violation.

In restricting its holding to “‘conspiracy,”’ the lower court

also apparently chose to read out of the Sherman Act (15

U.S.C. § 1) the words ‘“‘contract,”” and “combination” which

so aptly fit the royalty-free policy agreements of defendants

and their suppliers that the court held plaintiffs had proven.

Reasons for Granting the Writ.

[. Prompt RESOLUTION OF THE CONSTITUTIONALITY OF DEPRIV-

ING INDEPENDENT INVENTORS OF STANDING UNDER THE ANTI.

TRUST LAws TO CHALLENGE UNLAWFUL RESTRAINTS AND

MONOPOLIZATION IN THEIR TRADE Is OF VIT .L IMPORTANCE.

The District Court itself recognized the unusual

significance of the issues here-involved, terming them

‘fascinating issues of antitrust-patent litigation.”

It is of extreme current importance, particularly in these

times when the United States has been slipping in techno-

logical leadership and in which prompt stimulation to innova-

tion is so essential to our economic recovery, that the

Supreme Court pass upon the constitutionality of the new

and chilling doctrine of this case that inventors, because they

30 App. B, p. B17-B18.

13

may have paten s, do not have standing to challenge unlawful

restraints in ‘ ieir trade under the antitrust laws.

While the posture of this case does not permit a determina-

tion of whether the current plight of the American

automobile industry is at least in part due to a lack of outside

innovation caused by the complained-of policies of defendants

and their suppliers, this case certainly affords an opportunity

to restore competition in the creation and adoption of innova-

tion in that industry.

The writ should be granted for the further reason that the

lower court's holding that inventors lack standing appears to

be in direct conflict with a case decided by the Ninth Circuit.

In In re Multidistrict Vehicle Air Pollution M.D.L. No. 31.

481 F. 2d 122 (9th Cir. 1973), cert. denied sub nom. Morgan v.

Automobile Manufacturers Assn., Inc., 414 U.S. 1045 (1973),

the area of the economy allegedly affected by anticompetitive

conduct was that concerned with research, development,

manufacture, installation, and patenting of automotive air

pollution control devices. In that context, the court stated

that ‘‘plaintiffs falling within one or more of these markets

. include an alleged inventor ... who claim[s] losses from

asserted inability to market [his] devices.” 481 F. 2d at 129

n.10.

Certainly, no authority need be cited for the fact that this

Supreme Court has historically granted writs to examine the

patent-antitrust interfaces of the law and conflicts between

the circuits.

The lower court has found, as before stated, that the

complained-of practices have been proven to exist (pp. 8.9,

12, supra) and that plaintiffs have suffered injury as a direct

result thereof (p. 10, supra).

14

Il. Ir Is ALSo OF EXTREME IMPORTANCE TO RESOLVE WHETHER

A SHARED Monopo._y Or RESTRAINT OF TRADE RESULTING

FROM CONSCIOUS PARALLELISM OF THE MARKET ACTIVITIES OF

Economic GIANTS Is VIOLATIVE OF THE ANTITRUST LAws.

Although it was stated in Theatre Enterprises, Inc. v. Para-

mount Film Distributing Corp., 346 U.S. 537, 541 (1954)

(cited by the lower court), that conscious parallelism of itself

is not the same as ‘“‘conspiracy” under § 1 of the Sherman

Act, it is believed most important for this Supreme Court to

speak to the applicability of the antitrust laws to a shared

monopoly or restraint of trade created by conscious

parallelism of the market activities of the defendants in con-

junction with a proven “contract” or ‘‘combination”’ between

defendants and suppliers (including common suppliers) which

prevents plaintiffs, as independent inventors, from com-

peting with the in-house inventors of defendants and defend-

ants’ suppliers.

Conclusion.

The encouragement of competition in the field of invention

and innovation was never needed more by our country. This

Court can be of great service by restoring to inventors the

protection of the antitrust laws that other classes of citizens

enjoy, and by freeing the channels for innovation in the

automotive industry.

Respectfully submitted,

ROBERT H. RINES,

RINES AND RINES,

10 Post Office Square,

Boston, Massachusetts 02109.

(617) 482-3289

Of Counsel:

NANCY RICHARDS-STOWER, ESQUIRE

RINES AND RINES

Al

Appendix A.

NELSON H. SHAPIRO:

AND

RICHARD G. BOARD,

APPELLANTS,

Vv.

GENERAL MOTORS CORPORATION:

AND

FORD MOTOR COMPANY,

APPELLEES.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MARYLAND, AT BALTIMORE,

HONORABLE FRANK A. KAUFMAN, HONORABLE JAMES R. MILLER. JR.,

AND HONORABLE JOSEPH H. YOUNG, DISTRICT JUDGES.

Argued: October 6, 1980

Decided: November 21, 1980

Before Bryan, Senior Cirenit Judge,

RUSSELL and WIDENER, Cirenit Judges.

Robert H. Rines (Nancy Richards-Stower, Rines and Rines: Melvin

J. Sykes on brief) for Appellants; Dunean J. Farmer (Otis M.

Smith, William B. Slowey, General Motors Corporation on brief),

David F. Albright (Franklin T. Caudill, Semmes, Bowen & Semmes

on brief) for Ford Motor Company; (John R. Phillips, Ford Motor

Company on brief) and Paul V. Niemeyer, Piper & Marbury,

General Motors Corporation on brief) for Appellees.

PER CURIAM:

This is an appeal from an order of the Federal District

Court for Maryland, dated October 4, 1979, granting sum-

mary judgment and dismissing the suit of Nelson N. Shapiro

and Richard G. Board against General Motors Corporation

and Ford Motor Company. The complaint charged defend-

ants with antitrust violations under the Sherman Act, 15

U.S.C. §§ 1 and 2, and the Clayton Act, 15 U.S.C. § 12, and

with unfair competition under the common law. The antitrust

claims were averred in Count I and the unfair competition

assertions were embodied in Count II of the complaint. Addi-

tionally, there was Count III, pleading infringement of the

plaintiffs’ patent. However, the third count was not em-

braced in either of the summary motions and, therefore, in

the record they are termed “‘partial summary motions”.

The grievances charged to the defendants involved their

contracts of purchase with suppliers for a certain automatic

retracting automotive seat belt apparatus patented by the

plaintiffs.

The dismissal of the plaintiffs’ action rests on the searching

and closely reasoned decision of the trial court, and we affirm

on the opinion of the District Judge. Shapiro, etal. v. Gren ral

Motors Corporation, et al., 472 F.Supp. 636 (1979).

AFFIRMED.

51

Appendix B.

Nelson H. SHAPIRO et al.

v.

GENERAL MOTORS CORPORATION et al.

Civ. No. Y-71-1329.

United States District Court,

D. Maryland.

May 29, 1979.

JOSEPH H. YOUNG, District Judge.

I. THE FACTS

Plaintiffs Board and Shapiro spend their spare time as in-

ventors of automotive seat belt equipment. Plaintiff Board is

a practicing psychiatrist, and Shapiro an engineer and a

patent attorney. In the mid-1960s, the federal government

required the installation of seat belts in all new cars sold in

the U.S. market. Plaintiffs Board and Shapiro held patents

relating to an automatic seat belt retractor, a device which

locks seat belts into place and prevents their slippage while

being worn by a passenger. In order to realize a return on

their investment in the patented articles, plaintiffs sought to

license the articles directly with the nation’s major car

manufacturers. When they approached General Motors

(“GM”) in 1963, George Cook, the general director of pur-

chasing, told plaintiffs that they had to talk with Hamill

Manufacturing Company (‘Hamill’), one of GM’s suppliers

of various automotive parts. According to Cook, GM did not

B2

deal directly with outside inventors, preferring instead to

route them through suppliers. Plaintiffs also met with

representatives from Chrysler and American Motors and

with other suppliers of seat belt equipment, including Borg-

Warner, American Safety Equipment Company (‘‘American

Safety’’), and Irvin Industries.

The major car manufacturers told plaintiffs that to license

their seat belt retractor device, they had to negotiate directly

with the suppliers rather than with the manufacturers

themselves. Consequently, plaintiffs commenced licensing

negotiations in 1963 with American Safety and completed

these negotiations in 1965. It was in conducting these

negotiations beginning in 1963 that plaintiffs first became

aware of defendants’ policy of requiring royalty-free second

source licenses. The practice of insisting upon royalty-free

second source licenses is an attempt by the car manufac-

turers to guarantee a steady supply of particular parts used

in their automotive production lines from multiple sources. In

exchange for a supplier’s receiving a certain share of a car

manufacturer’s business for a given input, the supplier must

sign an agreement releasing the car manusacturer from hav-

ing to pay any item-by-item royalties on the patented prod-

ucts made by the supplier. The obvious effect of such a policy,

regardless of whether it is devised to guarantee a steady sup-

ply or for other reasons, is to reduce to zero the royalties

which the inventors eventually receive. In other words, from

a purely competitive standpoint, a licensee-supplier could not

expect to remain in business very long if he agreed to pay

royalties to inventors where his competitors did not agree, in

effect, to cut their own profits by likewise paying royalties. In

concluding a licensing agreement with Hamill in 1965, plain-

tiffs did agree to relinquish their right to 60% of the potential

royalties.

B3

American Safety constructed and tested manufacturing

prototypes of plaintiffs’ inventions beginning in 1965, and

plaintiffs received some $95,000, including a $25,000 down

payment and minimum royalties under the licensing agree-

ment. In 1966, however, American Safety cancelled the

licensing agreement before plaintiffs’ inventions were actual-

ly marketed.

Plaintiffs then renewed negotiations with Hamill in 1967

but were again confronted with a requirement for a royalty-

free license provision of 50% of the procurement needs of the

automobile manufacturers. No license agreement was ever

concluded with Hamill.

In 1969 and 1970, plaintiffs again negotiated with Hamill to

obtain licensing and to develcp commercially plaintiffs’ in-

ventions. After several meetings, Hamill finally told plain-

tiffs that it would be economically unfeasible for them to pay

plaintiffs’ royalties, because Hamill would be operating at a

competitive disadvantage vis-a-vis non-royalty-paying second

source licensees designated by Ford and GM.

According to plaintiffs, similar negotiations with American

Safety, Hamill, and Irvin Industries resulted in no licenses

ever being consummated. In the case of negotiations with

Irvin Industries, Irvin requested that plaintiffs agree to

granting royalty-free licenses to car manufacturers for 90%

of the manufacturers’ procurement requirements for plain-

tiffs’ inventions. This meant that plaintiffs would receive

royalties on only 10% of their inventions. These license

negotiations were also unsuccessful.

As plaintiffs conclude in their Memorandum arguing for

summary judgment,

In every instance in which plaintiffs either licensed or

attempted to license their inventions to a seat belt sup-

plier of the defendants, plaintiffs were faced with a situa-

tion in which, because of the royalty-free, second-source

B4

licensing policies of the defendants, the prospect of pay-

ing reasonable royalties to plaintiffs was economically

unattractive to the supplier.

Plaintiffs’ Memorandum at 23.' On the basis of this alleged

injury, plaintiffs filed a suit in this Court in 1971 against

defendants GM and Ford. Contesting the legality of the roy-

alty-free second source licensing policies, plaintiffs charged

defendants with engaging in trade practices which restruc-

tured the entire industry relationship between inventors,

licensee-suppliers, and the automakers. According to plain-

tiffs, the impact of defendants’ policies not only tends to

foster backward integration in the auto industry since sup-

pliers must increasingly follow the dictates of the car

manufacturers but also encourages a trend away from past

practices whereby the auto industry relied heavily on various

suppliers to discover inventions having new technology.

Whereas at one time outside inventors were the principal

sources of innovation in the automotive industry, plaintiffs

contend that today any innovations come from in-house staff

inventors, and the net result, aggravated by defendants’

royalty policies, is to make it economically impossible for sup-

pliers to deal with outside inventors.

Since the case was initially filed in 1971, discovery delays

and numerous motions have produced seemingly unnecessary

complications. While plaintiffs’ theories as to patent-anti-

trust liability may, to some extent, be novel, the issues pre-

sented are not insurmountable. In its current posture, the

case is before this Court on cross motions for partial sum-

mary judgment. Plaintiffs’ complaint includes three counts:

Count One alleges antitrust violations; Count Two, by reas-

serting the allegations of Count One, claims unfair competi-

' References to ‘Plaintiffs’ Memorandum” hereinafter refer to

the Memorandum submitted in support of their motion for sum-

mary judgment, filed with this Court on June 15, 1978.

B5

tion; and Count Three states a claim for patent infringement.

Only Counts One and Two are the subject matter of the par-

tial summary judgment motions presented at this juncture.

Claiming defendants’ alleged infractions of the antitrust laws

to be per se violations, plaintiffs seek both treble damages

and an injunction against further violations.

Plaintiffs have moved for summary judgment pursuant to

Rule 56(e) of the Federal Rules of Civil Procedure, stating

that the material facts as pleaded are not in dispute. Defend-

ants have responded but suggest that plaintiffs lack standing

to pursue their claims and that plaintiffs’ suit is barred by the

applicable statute of limitations and the doctrine of laches.

Il. EVIDENCE OF CONSPIRACY

This case presents several fascinating issues of antitrust-

patent litigation.? The essence of plaintiffs’ complaint is that

defendants’ alleged policy of requiring royalty-free second

source licensing, in effect, made ‘‘the prospect of paying

reasonable royalties to plaintiffs ... economically unattrac-

tive to the supplier.’ Plaintiffs’ Memorandum at 23. While

this result hurts the plaintiffs financially, they also seek to

broaden this Court’s conception of the real nature of the

social harm involved by stating that the overall impact of

defendants’ licensing policy is to damage the ‘‘market for in-

novation” in the entire automobile industry:

Simply stated, defendants have blocked the flow of

technological improvements between plaintiffs and auto-

* Article I, § 8, cl. 8 of the Constitution provides Congress with

the authority to grant inventors exclusive rights to their

discoveries for limited periods to promote new ideas and innova-

tion. Pursuant to this constitutional grant, Congress passed the

Patent Act, 35 U.S.C. §§ 1-293 (1976). See Note, Patent

Law—License Agreements, 18 Vill. L. Rev. 968, 969-70 n.12 (1973).

B6

mobile buyers, thereby effectively restraining plaintiffs

in their efforts to compete in the market for innovation

in original automotive equipment.

Plaintiffs’ Memorandum at 26 (emphasis added).

The complaint is artfully phrased, and reading through the

various documents filed during the past seven years it

becomes apparent that what is actually going on here is an at-

tempt by plaintiffs to make some money on their invention.

Both the discovery and their own admissions (see Plaintiffs’

Memorandum at 20-23) indicate that they have a relatively

weak record in terms of “‘paying”’ relationships with sup-

pliers. Consequently, one might suppose that the language

about the ‘“‘market for innovation” is an effort by plaintiffs to

temper their profitmaking motives with a general appeal to

overall consumer welfare. It would seem, then, that given

their theory of harm, plaintiffs have an obligation to explain

how their failure to make a significant return on their invest-

ment as inventors resulted in an injury to the “market for in-

novation.” What they appear to mean is that without a return

for their efforts, they and others like them must give up in-

venting. As will be discussed in greater detail below,

however, the antitrust laws do not automatically guarantee

inventors returns for their activities.* Insofar as the con-

sumer welfare issue is concerned, it would seem possible for

the auto manufacturers to argue that not having to pay

royalties might mean lower costs to consumers. If this is so,

3 While the primary objective of patent law is the public benefit,

Rep. Att’y Gen. Nat’l Comm. to Study Antitrust Laws 224 (1955),

it remains generally true that ‘‘... whilst the remuneration of

genius and useful ingenuity is a duty incumbent upon the public,

the rights and welfare of the community must be fairly dealt with

and effectually guarded. Considerations of individual emolument

can never be permitted to operate to the injury of these. * * *”

(Footnote omitted). Jd. citing Kendall v. Winsor, 21 How. 322,

327-29, 16 L.Ed. 165 (1859).

B7

then plaintiffs should be able to explain how losing them as in-

novators is more valuable to consumers than paying lower

car prices because of defendazts’ royalty-free licensing

policy.

A. Alleged Violations of Section 1 of the Sherman Act

Section 1 of the Sherman Act provides that:

Every contract, combination in the form of trust or

otherwise, or conspiracy, in restraint of trade or com-

merce among the several States, or with foreign nations,

is hereby declared to be illegal.

15 U.S.C. § 1 (1976). Plaintiffs claim that by combining with

their suppliers to enforce their royalty-free license policies,

defendants have created a per se violation of the antitrust

laws. In paragraph 15 of their complaint, plaintiffs charge

that defendants

have attempted to and have conspired to monopolize and

deliberately and by conscious parallelism have

monopolized trade and commerce in the automotive in-

dustry in said equipment and apparatus by the policies

and acts, among others, enumerated above, in violation

of the antitrust laws, inciuding Section 2 of the Sherman

Act.

Complaint at 7. In support of their claims, as advanced in

their summary judgment motion, plaintiffs refer to a number

of the most important antitrust conspiracy cases; however, in

most of these instances, their reliance is misplaced since the

conduct prohibited in those cases clearly involved conspiracy.

As will be explained below, to this date there has been no

colorable showing of a conspiracy in this case, and at this

latest stage in the development of this case, plaintiffs’

counsel admit as much.

B8

Plaintiffs argue that ‘“‘[w]here someone else acts in tandem

with the malevolent actor, the parties to the combination may

have different, and even conflicting goals, but there is still a

combination.”’ Plaintiffs’ Memorandum at 26. Their reliance

on United States v. Parke, Davis & Co., 362 U.S. 29, 80 S.Ct.

503, 4 L.Ed.2d 505 (1960), however, is misguided. Parke,

Davis was a resale price maintenance case in which the

Government had introduced evidence showing that Parke,

Davis had actually announced a policy of refusing to deal with

retailers who failed to charge the minimum prices required by

Parke, Davis. Parke, Davis was active in setting up and main-

taining this series of arrangements. As the Court noted,

‘‘Each wholesaler was interviewed individually but each was

informed that his competitors were also being apprised of

this. The wholesalers without exception indicated a will-

ingness to go along.’”’ 362 U.S. at 33, 80 S.Ct. at 506. The

Court noted a difference between ‘“‘mere customer selection’

and behavior which ‘‘created combinations or conspiracies to

enforce resale price maintenance.”’ 362 U.S. at 38, 80 S.Ct. at

508.

Given the previous reasoning in United States v. Colgate,

250 U.S. 300, 39 S.Ct. 465, 63 L.Ed. 992 (1919), it became

evident that what was condemned in Parke, Davis was the

particular method used to secure enforcement of the resale

price maintenance scheme. The Colgate opinion has become

celebrated on the basis of the following key passage:

In the absence of any purpose to create or maintain a

monopoly, the [Sherman] act does not restrict the long

recognized right of trader or manufacturer engaged in

an entirely private business, freely to exercise his own

independent discretion as to parties with whom he will

deal; and, of course, he may announce in advance the cir-

cumstances under which he will refuse to sell.

B9

250 U.S. at 307, 39 S.Ct. at 468. Thus, under Colgate there

was room for an agreement between the manufacturer and

retailers to fix retail prices so long as their behavior fell short

of becoming a conspiracy. Parke, Davis narrowed the Colgate

privilege to the ‘‘mere announcement of ... [the manufac-

turer’s] policy [of not dealing with price cutters] and the sim-

ple refusal to deal.”’ 362 U.S. at 44, 80 S.Ct. at 512. See R.

Posner, Antitrust Law: An Economic Perspective 153-56

(1976).4

What happened in Parke, Davis, therefore, was the occur-

rence of activity which went beyond the limits set in Colgate:

When the manufacturer’s actions, as here, go beyond

mere announcement of his policy and the simple refusal

to deal, and he employs other means which effect

adherence to his resale prices, this countervailing con-

sideration is not present and therefore he has put

together a combination in violation of the Sherman Act.

362 U.S. at 44, 80 S.Ct. at 512. The Court held that in “‘in-

. volving the wholesalers to stop the flow of Parke, Davis prod-

ucts to the retailers, thereby inducing retailers’ adherence to

its suggested retail prices,’ Parke, Davis stepped beyond the

limitations permitted in Colgate. 362 U.S. at 45, 80 S.Ct. at

512. In seeking assurances of compliance as well as the com-

pliance itself, 362 U.S. at 46, 80 S.Ct. 503, Parke, Davis was

found to have organized a price-maintenance combination or

conspiracy in violation of the Sherman Act. 362 U.S. at 47, 80

S.Ct. 503.

4 Posner. notes that some commentators believe that the implicit

theory in Parke, Davis is that the combination between Parke,

Davis and its wholesalers resembled a boycott, which is a per se

violation of the Sherman Act. Posner questions this since resale

price maintenance is also a per se violation. R. Posner, supra, at

155-56. Colgate has been traditionally criticized on the grounds that

it weakens the per se prohibition against resale price maintenance

first enunciated in Dr. Miles Medical Co. v. John D. Park & Sons

Co., 220 U.S. 378, 31 S.Ct. 376, 55 L.Ed. 502 (1911).

B10

Plaintiffs’ reliance on Klor’s Inc. v. Broadway-Hale Stores,

Inc., 359 U.S. 207, 79 S.Ct. 705, 3 L.Ed.2d 741 (1959), is

likewise misplaced. They characterize Klor’s as holding that

“concerted action to deprive even a single merchant of the

goods he needed to compete effectively was a per se

violation.”’ Plaintiffs’ Memorandum at 31. Although

technically accurate, this assessment ignores the fact that

Klor’s involved a group boycott of proportions not alleged in

the instant case:

Alleged in this complaint is a wide combination con-

sisting of manufacturers, distributors and a retailer.

This combination takes from Klor’s its freedom to buy

appliances in an open competitive market and drives it

out of business as a dealer in the defendant’s products.

359 U.S. at 212-13, 79 S.Ct. at 710. While it remains true that

the Sherman Act “‘has consistently been read to forbid all

contracts and combinations ‘which “tend to create a monop-

oly,’ whether ‘the tendency is a creeping one’ or ‘one that

proceeds at full gallop,’ International Salt Co. v. United

States, 332 U.S. 392, 396 [, 68 S.Ct. 12, 92 L.Ed. 20].”’ 359

U.S. at 213-14, 79 S.Ct. at 710, as in Parke, Davis, the anti-

competitive behavior condemned in..Klor’s had _ the

characteristics of the type of public wrong proscribed by the

Sherman Act.

The list of cases cited by plaintiffs includes some of the

most noteworthy precedents in antitrust jurisprudence, yet

in the case of virtually every alleged violation—market exclu-

sion, blocking entry, and creating ‘‘bottlenecks’’—plaintiffs’

allegations describe defendants’ behavior in purely con-

clusory terms so as to make defendants’ behavior appear to

fit within a given anticompetitive practice.

1. Market exclusion. On this point, plaintiffs cite American

Federation of Tobacco Growers, Inc. v. Neal, 183 F.2d 869

(4th Cir. 1950), where the violation consisted of defendants

Bll

allotting selling time on a tobacco auction market so as to ex-

clude plaintiff, a tobacco farmers’ cooperative, from the local

market and effectively from competing against defendants,

the Danville Tobacco Association. What the court condemned

was the concerted behavior of ‘“‘tobacco warehousemen who

use their organization into a board of trade to monopolize the

time of the tobacco buyers allotted to the market and thus to

exclude another warehouseman from competing on the

market with them.” 183 F.2d at 873. See also Karseal Corp.

v. Richfield Oil Corp., 221 F.2d 358 (9th Cir. 1955) (contract

requirements and agreements of exclusive dealing con-

demned).° While market exclusion may describe the impact of

defendants’ policies upon plaintiffs, there has been no evi-

dence of the sort of ‘“‘concerted behavior’ prohibited in A mer-

ican Federation.

2. Blocking entry. Plaintiffs adopt a ‘‘but for’? argument

(Plaintiffs’ Memorandum at 23, 49 & 50) to the effect that

they would have received royalties and, implicitly, licenses

with suppliers, had defendants not engaged in illegal pricing

activities. In Parmelee Transportation Co. v. Keeshin, 144

F.Supp. 480 (N.D.IIl. 1956), aff'd, 292 F.2d 794 (7th Cir.

1961), plaintiffs argued that defendants deliberately closed to

them competition in ‘‘an important field of interstate com-

merce,” 144 F.Supp. at 484, and defendants claimed that by

* The Karseal court also reaffirmed the ‘‘target area’’ doctrine as

to proximate cause in an antitrust injury:

the rule is that one who is only incidentally injured by a viola-

tion of the antitrust laws,—the bystander who was hit but not

aimed at,—cannot recover against the violator. Loeb v.

Eastman Kodak Co., 3 Cir. 1910, 188 F. 704; Gerli v. Silk

Ass'n of America, D.C.S. D.N.Y. 1929, 36 F.2d 959; Corey v.

Boston Ice Co., D.C.Mass. 1918, 207, F. 465; Conference of

Studio Unions v. Loew’s, Inc., supra (9 Cir., 1951, 193 F.2d

O1).

221 F.2d at 363.

B12

conspiracy or otherwise, the railroads might have awarded

the terminal contract to a party other than plaintiffs. In

refusing to dismiss the complaint, the court stated:

It is beyond the power of the plaintiff, or anyone else, to

say now with certainty what might or might not have

happened had the conspiracy not intervened. Facts have

been alleged from which it would be possible and reason-

able to draw the inference that the contract would have

been awarded to plaintiff but for the wrongful conduct of

the defendants. This is sufficient.

144 F.Supp. at 485-86. Again, however, Parmelee involved

significantly more ‘‘deliberate’’ behavior than the instant

case. See also United States v. General Dyestuff Corp., 57

F Supp. 642 (S.D.N.Y. 1940). While it is true that ‘‘[nJeither

the letter of the law nor its purpose ‘distinguishes between

strangling of commerce which has been born and preventing

the birth of a commerce which does not exist,’ ’’ United

States v. United Shoe Machinery Co., 247 U.S. 32, 53, 38

S.Ct. 473, 480, 62 L.Ed. 968 (1918), it can be questioned

whether plaintiffs accurately characterize themselves as be-

ing engaged in ‘‘commerce’’ in the traditional sense as that

word is used in the antitrust laws. For example, does it even

make sense to talk of excluding inventors from a market?

Unless the inventor manufactures and sells his invention

himself, it is not immediately clear how an inventor is being

“excluded”’ from a market or even from entering into com-

merce. While an inventor would undoubtedly have a financial

interest in whatever royalties were generated once his inven-

tion were licensed and marketed, unless he manufactured the

invention himself (which plaintiffs Board and Shapiro do not),

it is doubtful that the inventor could allege that the ‘birth of

a commerce”’ had been aborted.® As the court in Raitport v.

6 This issue will be treated in considerable detail in the discussion

of antitrust standing, infra.

B13

General Motors, No. 73-2054 at 5 (E.D.Pa. 1975), aff'd, 547

F.2d 1163 (8rd Cir. 1976), cert. denied, 431 U.S. 932, 97 S.Ct.

2639, 53 L.Ed.2d 248 (1977), said with respect to a similar

claim to the effect that defendant car manufacturers were

restraining new companies from entering the automotive

components market, neither plaintiff nor any other auto-

motive component “‘inventor-entrepreneur”’ has a federally

guaranteed right to have his business proposals accepted and

financed by private automotive companies. Moreover, the

Supreme Court has long recognized the right of private com-

panies, in the absence of any purpose to create or maintain a

monopoly, to freely choose the parties with whom they will

deal. United States v. Colgate & Company, 250 U.S. 300, 307,

39 S.Ct. 465, 63 L.Ed. 992 (1919).

In Gamco, Inc. v. Providence Fruit and Produce Building,

194 F.2d 484 (1st Cir. 1952), the court noted that ‘‘[t]he

[Sherman] Act does not merely guarantee the right to create

markets; it also insures the right of entry to old ones.’’ 194

F.2d at 487. Articulating the appropriate standard for assess-

ing market exclusion, Judge Clark observed that “‘[t]he con-

junction of power and motive to exclude with an exclusion not

immediately and patently justified by reasonable business re-

quirements establishes a prima facie case of the purpose to

monopolize.” 194 F.2d at 488. Yet in Gamco, the exclusion af-

fected defendant’s competitors directly, whereas to speak of

the automakers and plaintiffs as direct competitors is to

engage in an exaggeration.

On the other hand, plaintiffs and defendants may ‘“‘com-

pete”’ to the extent that defendants maintain in-house inven-

tors. In the area of creative innovation, however, the tradi-

tional concepts of competition and market behavior seem

misplaced. Although Ford and General Motors maintain their

own in-house inventors, it seems unlikely that the

automakers would rely on their own staffs entirely. New

Bl4

ideas in the automotive field can emerge from noncompany

private ‘‘Edisons’’ as well as from company employees, and

to the extent that the automakers utilize inventions from men

like Board and Shapiro, they 1nay in fact be able to pick and

choose among new ideas until they discover what they want.

Moreover, they can select from among private inventors’ in-

ventions without having to put these inventors on the com-

pany payroll. While the patent licensing system prevents

companies from thereby getting a ‘‘free ride’ from others’

inventions, it is not at all clear as to whether the use of

private inventions is cheaper, even with the royalties, than

having in-house inventors.” Whether or not the use of private

inventors is cheaper than in-house inventors, the use of the

latter can be justified not on grounds of excluding people like

Board and Shapiro, but rather because the automakers’ in-

house staff can concentrate on providing inventions which

satisfy the automakers’ technological requirements at a given

time, whereas 100% reliance on private sources may prove

detrimental to the industry (and the public) as a whole. Once a

given product proves useful, like retractable seat belts,

“backward integration’”” whereby the defendants would

manufacture the input themselves may prove cheaper than

dealing with a supplier. However, it is clear that backward in-

tegration does not follow automatically in all cases, otherwise

Ford and GM would manufacture all of their own inputs, and

‘suppliers’ as such would cease to exist. The thrust of this

argument is towards one simple, pragmatic point: innova-

7 At issue here obviously is the difficulty in assessing both the

costs of arriving at an invention and the means of providing an ap-

propriate return on the investment undertaken. This problem is

complicated whenever a vital product is discovered by accident or

as a spinoff from research designed to produce something com-

pletely different. For an example involving “teflon” see W. S.

Bowman, Jr., Patent and Antitrust Law: A Legal and Economic

Appraisal 39 (1973).

B15

tion, like creativity generally, is a fanciful, unpredictable gift,

and plaintiffs’ argument that defendants are trying to drive

them out of or exclude them from the so-called market for in-

novation makes little sense. There would be no rational

reason for defendants to exclude anyone from such a market

because at any given time and for any patented input there is

never any guarantee that in-house research and development

will be better or cheaper or more successful than research

and development supplied by private noncompany inventors.

It cannot be seriously stated that defendants want to

eliminate a source of potential benefit to themselves.

Plaintiffs cite Gamco, supra, for the view that

a firm that controls a market must treat those within it

evenhandedly. Where a firm gains value from innovation

which it adopts for its own use, it must pay for that in-

novation. Certainly defendants pay their own in-house

researchers. To refuse to pay outsiders for their innova-

tion is to destroy those outsiders as competitors, in favor

of the defendants’ own in-house inventors.

Plaintiffs’ Memorandum at 46. Plaintiffs are not being

destroyed by defendants’ refusal to pay them royalties. If

anything, plaintiffs are either bad businessmen, poor

negotiators, excessively profit-motivated, or all three. The

patent laws protect their inventions, and they remain free to

charge what they can get for their ideas. If they do not like

the price, they simply do not have to sell. An aggrieved pro-

spective purchaser will either do without the input or find

available substitutes, possibly through “inventing around’’

the patent.

3. Bottlenecks. Related to plaintiffs’ claim of market exclu-

sion is their assertion that defendants control the market for

innovation, thereby constituting a ‘‘bottleneck.” Plaintiffs’

Memorandum at 47. They elaborate upon this claim, explain-

ing that the ‘theory provides that where a firm controls an

B16

essential stage of the production or distribution of a good and

it competes at another level of production, it will be guilty of

a Section 2 violation if it forecloses in any way access by its

competitors to the essential stage.” Jd. at 47.8 As authority,

plaintiffs cite, inter alia, Gamco which is inapposite for the

reasons discussed above, and Packaged Programs, Inc. v.

Westinghouse Broadcasting Co., 255 F.2d 708 (8d Cir. 1958),

which is likewise poor authority to cite in connection with the

evidence in this case. In Packaged Programs, the defendant

already possessed a lawful telecasting monopoly and was

using that monopoly power to create illegal monopolies

elsewhere.

Lastly, reference should be made to plaintiffs’ citation of

Standard Oil Co. of New Jersey v. United States, 221 U.S. 1,

60, 31 S.Ct. 502, 55 L.Ed. 619 (1911): “In applying the rule of

reason, the touchstone is that the Sherman Act covers all

conceivable conduct which could possibly come within its spir-

it or purpose.”’ Plaintiffs’ Memorandum at 42. Standard Oil

is one of the most monumental of antitrust cases. According

to this Court’s reading of the case, plaintiffs’ statement in-

verts what Justice White was really saying—for what he ac-

tually said was that because the Sherman Act was worded so

broadly, it could cause ‘‘any act done by any of the enum-

erated methods anywhere in the whole field of human activity

to be illegal if in restraint of trade.’’ 221 U.S. at 60, 31 S.Ct.

at 516. Because of this potential breadth of coverage, Justice

8 Section 2 of the Sherman Act reads as follows:

Every person who shall monopolize, or attempt to

monopolize, or combine or conspire with any other person or

persons, to monopolize any part of the trade or commerce

among the several States, or with foreign nations, shall be

deemed guilty of a misdemeanor, and, on conviction thereof,

shall be punished by fine not exceeding fifty thousand dollars,

or by imprisonment not exceeding one year, or by both said

punishments, in the discretion of the court.

B17

White advocated a rule of reason approach for non-per se

cases and called for the “exercise of judgment which required

that some standard should be resorted to for the purpose of

determining whether the prohibition contained in the statute

had or had not in any given case been violated.”’ 221 U.S. at

60, 31 S.Ct. at 516. Through Standard Oil and his opinion in

United States v. American Tobacco Co., 221 U.S. 106, 31

S.Ct. 682, 55 L.Ed. 663 (1911), Justice White gave content to

the rule of reason approach to antitrust liability in a three-

part form: (1) the “inherent nature”’ or per se concept of il-

legality; (2) the “inherent effect’ or market power concept;

and (3) the evident purpose or specific intent concept. See R.

H. Bork, The Antitrust Paradox: A Policy At War With Itself

37 (1978). Among the major attributes of Justice White’s

opinion is that it showed concern “that the statute not in-

terfere with means of creating efficiency or with market

structures that resulted from efficiency.” R. H. Bork, supra,

at 34. Consequently, Standard Oil does not support an ex-

pansive application of the Sherman Act but rather suggests

an application which, in non-per se cases, is sensitive to the

preservation of economically efficient market structures

wherever possible. Although plaintiffs have claimed a per se

violation by defendants, they have failed to provide evidence

of a conspiracy to violate the antitrust laws. The evidence

presented thus far demonstrates that Ford and GM did insist

upon the royalty-free second source licensing policy;

however, the mere existence of the requirement does not

automatically compel the conclusion that a conspiracy was

presented or that the requirement otherwise violates the an-

titrust laws.

At the hearing on the cross motions for partial summary

judgment, plaintiffs’ counsel presented considerable evidence

establishing that Ford and GM insisted that their suppliers

B18

agree to the royalty-free paid up license provisions.’ Sum-

marizing numerous deposition statements, contract provi-

sions and other documents discovered during the seven years

since this case began, plaintiffs’ counsel succeeded in show-

ing that the royalty-free policies existed but not that there

was any form of conspiracy between the automakers. At one

point during the hearing, plaintiffs’ counsel indicated that the

record showed that Ford and GM purchase more than three

quarters of all seat belt equipment installed in American cars

and between the two of them make three-quarters of all

American cars. These observations were made to show that

parallel policies exist resulting in independent inventors be-

ing prevented from dealing with the relevant market. Yet,

when the Court further inquired as to whether there was any

indication that this result was a mere happenstance or the

consequence of an actual conspiracy, plaintiffs’ counsel

responded:

We have no proof of conspiracy. We just say it is a very

strange thing that the two giants—having some common

suppliers of the same product and substantially the same

equipment, and even as Mr. Cook says, sometimes

possibly interchanging the use of tools, vice versa—that

they should come up with all the same kind of re-

quirements, those requirements being free licenses,

ownership of tools. . . .

Transcript of Hearing on cross motions for summary judy-

ment at 20 (Oct. 20, 1978).

* The evidence consisted of portions of the depositions of various

officials from Ford and GM, including Messrs. Desmarais, Cook,

and Fisher who were intimately involved in or knowledgeable

about the automakers’ patent licensing policies, as well as licensing

agreements, correspondence, and an internal Ford Supply Manual

outlining the procedures for negotiation of license agreements. The

highlighted portions of these documents demonstrate the existence

of the policy but do not indicate the presence of a conspiracy.

B19

Judging from this candid response as well as from the

evidence presented thus far, the true nature of plaintiffs’

substantive antitrust argument is not the existence of a con-

spiracy but the presence of consciously parallel behavior as

manifested in the royalty-free second source licensing policy.

Both parties have raised the issue of ‘conscious parallelism”’

in their memoranda. Conscious parallelism, also known as the

‘interdependence theory” of oligopoly pricing, refers to the

situation alleged to result in markets where there are a few

sellers and where, though lacking an express agreement, the

sellers appear to establish their prices in a ‘‘consciously

parallel” fashion. See generally, R. Posner, Antitrust 115-27

(1974). Allegations of conscious parallelism have generally

been considered in the light of Justice Clark’s famous

remarks in Theatre Enterprises, Ine. v. Paramount Film

Distributing Corp., 346 U.S. 587, 540-41, 74 S.Ct. 257,

259-260, 98 L.Ed. 273 (1954):

The crucial question is whether respondents’ conduct

toward petitioner stemmed from independent decision or

from an agreement, tacit or express. To be sure,

business behavior is admissible circumstantial evidence

from which the fact finder may infer agreement.

* k * * * *

But this Court has never held that proof of parallel

business behavior conclusively establishes agreement or,

phrased differently, that such behavior itself constitutes

a Sherman Act offense. Circumstantial evidence of con-

sciously parallel behavior may have made heavy inroads

into the traditional judicial attitude toward conspiracy;

but, “conscious parallelism” has not yet read conspiracy

out of the Sherman Act entirely. * * *

Justice Clark's approach to the conscious parallelism problem

is still valid, although there have been recent signs that an-

titrust officials will begin prosecuting in the near future the

B20

first of a series of “shared monopoly” cases involving large

companies in concentrated industries. See, e¢.y., Iynatius,

Taking Aim at ‘Shared Monopolies,’ Wall St.J., Aug. 22,

1978, at 18, col. 4. In light of the uncertain success which the

Justice Department is likely to have as well as the absence of

any departure from the traditional approach to conscious

parallelism, for the purpose of this case, Justice Clark’s

reasoning is still valid.

III. THE ECONOMICS OF PLAINTFFS’ POSITION

In light of the discussion as to the nature of the alleged

harm complained of in this case and because the antitrust

laws have as one of their primary goals the promotion of

economic efficiency, see R. H. Bork, supra, at 91-92, it is in-

structive to examine several of the economic issues

presented.

A. Monopsony and Oligopsony

What is unusual about this case is that it appears to present

an example of monopsony rather than monopoly, and this

feature serves to complicate not only the legal analysis but

the economic and policy aspects of the case as well. A

monopoly is said to exist “if there is one, and only one, seller

in a well-defined market.’”’ C. E. Ferguson, Microeconomic

Theory 284 (1972). Given that neither Ford nor GM alone

manages to account for more than half of the total U.S.

automobile market, what we would ordinarily have, from a

seller’s perspective, is an oligopoly. Oligopoly exists “when

more than one seller is in the market, but when the number is

not so large as to render negligible the contribution of each.”

C. E. Ferguson, supra, at 334. In this case, however, plain-

tiffs are alleging that defendants’ behavior as purchasers of

B21]

inputs for their final products rather than their behavior as

sellers to the public constitutes the gravamen in violation of

the antitrust laws. ‘Where there is a single buyer of an input

a monopsony is said to exist; if there are several buyers

vligopsony is the proper designation.”” C. E. Ferguson,

supra, at 456. [t is generally true that since all firms in a

yviven market producing the same product will need similar

inputs, one typically finds oligopsony in the input market

when there is a corresponding oligopoly in the seller's output

market. K. Lancaster, Introduction to Modern Microeco-

nomics 232 (1969). Ford and General Motors would fit this

characterization given their large market shares in the U.S.

car market. That it is this alleged monopoly in the input

market (monopsony) which is the heart of plaintiffs’ com-

plaint is apparent from the following passage in their

memorandum:

[In the usual price-fixing case, the producer is accused

of fixing the prices charged to its customers higher than

would be charged under unrestrained conditions. In this

case, Ford and GM fix the prices they pay the suppliers

for innovation at a rate /ower thar would be set under

unrestrained conditions. But since it is the buyers (the

defendant automobile companies), rather than the

sellers, who are exercising monopoly power in this case,

it is not surprising that the price-fixing results in lower

prices to the buyers, rather than higher prices to the

sellers.

Plaintiffs’ Memorandum at 40. In this passage, plaintiffs

come very close to admitting that the royalty-free licensing

policy means lower consumer prices. This result would follow

in the event that the automakers passed on these savinys

directly to consumers. In light of this situation, plaintiffs bear

a substantial burden in answering two crucial questions: (1)

Can they show unambiguously that Ford and General Motors

actually conspired to fix the prices at which they pur-

B22

chased their inputs? In other words, if there is no conspiracy

or agreement to fix prices, were not the major car manufac-

turers behaving as rational economic decisionmakers_ in

bargaining with their suppliers (plaintiffs’ licensees) to secure

the seat belt retractors at lower prices? and (2) Without

evidence of a conspiracy, are not the plaintiffs simply pre-

senting a case to the effect that they have been outbargained?

Does not the royalty-free policy benefit consumers? Abandon-

ing the royalty-free licensing policy would undoubtedly raise

prices for defendants, and, just incidently, line plaintiffs’

pockets.

Plaintiffs clearly want to extend the reasoning of Parke,

Davis, supra, to the facts of this case. They argue, for exam-

ple, that ““GM forced its suppliers to negotiate with each other

to shield GM from making payments for innovation. Each

supplier knew that the policy applied to all suppliers, and ac-

quiesced in the plan.”’ Plaintiffs’ Memorandum at 30. (Em-

phasis added). Although plaintiffs are absolutely correct as to

the impact of defendants’ pricing policy, it does not follow

necessarily that a negative impact upon plaintiffs is

necessarily the type of behavior automatically proscribed by

the antitrust laws. Similarly, plaintiffs argue that “‘{e]ven

though the wholesalers were duped, the Court found that the

use by one company of other companies to carry out its plan

is a conspiracy within the meaning of Section 1 of the Sher-

man Act.”’ Plaintiffs’ Memorandum at 29. While this passage

accurately characterizes the outcome in Parke, Davis, it is

only relevant here to the extent that the Court finds facts

evidencing a clear plan. In Parke, Davis there was con-

siderable correspondence establishing the alleged conspiracy.

There have been no such incriminating materials in this case.

Another difference from Parke, Duvis, to be discussed in

more detail below in connection with standing, is the element

of indirectness which permeates this entire case. Many of

B23

plaintiffs’ arguments sound as if they really should be made

on behalf of the licensees who actually supply the seat belt ap-

paratus to Ford and GM. Plaintiffs argue, for exampie, that

By making it impossible for their seat belt suppliers to

pay reasonable royalties to independent inventors for in-

novative contributions to the original automotive equip-

ment art, defendants have deprived plaintiffs of their

livelihood from their trade and business of inventing and

marketing inventions and have deprived the car-buying

public of the benefits of plaintiffs’ inventions.

Plaintiffs’ Memorandum at 27. In a typical passing-on situa-

tion, one party is attempting to recover damages based on

the fact that the antitrust violation occurred further

upstream in the chain of dealing. See Hanover Shoe, Inc. °.

United Shoe Machinery Corp., 392 U.S. 481, 88 S.Ct. 2224,

20 L.Ed.2d 1231, reh. denied, 393 U.S. 901, 89 S.Ct. 64, 21

L.Ed.2d 188 (1968). At issue then is the question of the

remoteness of the alleged injury from the occurrence of the

alleged violation. Usually in a passing-on situation, the injury

results from higher prices being passed along the chain of

distribution to consumers. In an oligopsony setting, however,

plaintiffs would be arguing in effect that /ower prices for in-

puts were being passed on and had an effect which was

detrimental to their business. This situation might be termed

i. ‘‘passback”’ since the presence of oligopsonistic conditions

means that lower prices (as plaintiffs argue) for the input pre-

vent the plaintiffs from even getting a foot in the door of the

relevant market.!°

' In their briefs, both sides have addressed the various issues

raised in this case which are similar to those presented in J/linois

Brick Co. v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707

(1977). Illinois Brick held that the pass-on theory, rejected as a

proper defense in Hanover Shoe, supra, could not be asserted offen-

sively by an indirect purchaser erry: against an alleged viola-

tor (defendant). 481 U.S. at 726, 97 S.Ct. 2061. In rejecting the

B24

B. Plaintiffs’ Economic Analysis

At several points in their memorandum in support of their

motion for summary judgment, plaintiffs advance a number

of economic arguments of questionable validity. As these

offensive use of passing-on, the court noted that to do otherwise

would be to run the risk of duplicative recoveries as well as to com-

plicate the ‘“‘evidentiary complexities and uncertainties” involved

in proving an offense. 431 U.S. at 732, 97 S.Ct. 2061. With regard

to the enforcement policies of the antitrust laws implicated by

restricting recovery to direct purchasers only, the court said:

[w]Je understand Hanover Shoe as resting on the judgment that

the antitrust laws will be more effectively enforced by concen-

trating the full recovery for the overcharge in the direct pur-

chasers rather than by allowing every plaintiff potentially af-

fected by the overcharge to sue only for the amount it could

show was absorbed by it.

431 U.S. at 734, 97 S.Ct. at 2069.

On its face, although the court specifically stated that the out-

come did not turn on the matter of standing, 431 U.S. at 728 n.7, 97

S.Ct. 2061, Illinois Brick appears relevant to the instant case,

especially as a precedent for defendants. Plaintiffs would minimize

its impact by referring to the possibility of Congressional modifica-

tions, while defendants cite it but without fully or precisely explain-

ing its relevance. Here, what is being passed-on is lower prices

rather than higher ones, and unlike the J/linois Brick situation,

recovery would not be concentrated on the intermediate party (7.e.,

the licensees) since that party has accepted the royalty-free policy.

This Court notes the relevance of [llinois Brick in light of what

may be called the “‘pass-back’”’ present in this case. Since the

presence of a patent context is vital to understanding the relevant

antitrust policies to be applied in this oligopsony context, the value

of Illinois Brick as a precedent must await further clarification by

the Supreme Court. The standing tests considered infra are suffi-

cient to dispose of the issues presented in this case, and the Court is

mindful of the Supreme Court’s distinction that ‘‘the question of

which persons have been injured by an illegal overcharge [read

‘“‘undercharge”’ here] for purposes of § 4 is analytically distinct

from the question of which persons have sustained injuries too

remote to give them standing to sue for damages under § 4.”’ 431

U.S. at 728, n.7, 97 S.Ct. at 2066, n.7.

B25

arguments touch substantially on the nature of the injury

which plaintiffs alleged, as well as on their claim that they

have standing, the Court will consider them briefly in light of

the economic, legal, and policy issues which they raise.

lL. “/tisa simple fact that the royalty-free license policies of

the defendants have shifted from the inventor to the defend-

ants the profit. associated with inventing.” Plaintiffs’

Memorandum at 37. While it is evident that plaintiffs are los-

ing out here, it does not necessarily follow that defendants

pocket the royalty. Although Ford and GM do not have to pay

the royalty, it seems to be a meaningless distinction as to

whether that money fills the coffers of the car manufacturers

or rather permits them to charge less for their cars.

2. “Faced with the unreasonable restraints of having to

grant free licenses to competitors, a policy dictated by the

defendants, the seat belt suppliers were hardly in a position to

deal fairly and at arm’s length with plaintiffs.”’ Plaintiffs’

Memorandum at 36. The suppliers are not being hurt, ap-

parently, so the reference to fairness and arm’s length deal-

ing is not entirely clear. As defendant GM points out in its

Memorandum in support of its motion for summary judg-

ment, at 22, it would appear that what plaintiffs are really

complaining about is the price term—/.e., that they are not

receiving enough money in order to compensate them ade-

quately for their investment.

3. “By requiring royalty-free licenses, the defendants effec-

tively set the price of innovation under such licenses at zero.”

Plaintiffs’ Memorandum at 39. Is it not the case that every in-

ventor who fails to license or market his innovation or inven-

tion achieves a zero return insofar as his “price of

innovation” is concerned? The antitrust laws do not

guarantee inventors returns on their inventions. The patent

laws do protect them against free riders for a period of seven-

teen years, allowing, in effect, a statutory monopoly, United

B26

States v. BE. I. DuPont de Nemours & Co., 118 F.Supp. 41

(D.Del. 1953), aff'd, 351 U.S. 377, 76 S.Ct. 994, 100 L.Ed.

1264 (1955);!! however, there is no guarantee of financial suc-

cess. See generally, W. S. Bowman, supra at 1-9.

4. ‘Defendants’ policies also have an indirect effect upon

the price to be paid for inventions, and that effect has been

declared unreasonable per se by the Supreme Court. The case

of the United States v. General Motors Corp., 384 U.S. 127 [86

S.Ct. 1321, 16 L.Ed.2d 415] (1966), furnishes an example.”’

Plaintiffs’ Memorandum at 39. The directness of the effect

will be considered below as part of the standing analysis. One

can read General Motors, however, to support a distinction

similar to that offered above in connection with Klor’'s and

Parke, Davis based upon substantially different facts being

proved. In General Motors, the anticompetitive behavior in-

volved was a classic conspiracy in restraint of trade involving

joint, collaborative behavior by dealers, associations and GM

to eliminate a group of competitors and to deprive franchised

dealers of the freedom to deal with discounters. 384 U.S. at

138-48, 86 S.Ct. 1321. At issue was the restrictiveness of a

particular “location clause”’ which GM attempted to enforce.

Again, since the pattern of behavior is admittedly different,

plaintiffs’ reliance on General Motors is necessarily under-

mined.

5. “In this case, each defendant has total control over the

decision as to what technology is embodied in its cars and

each maintains research staffs in competition with outside in-

ventors providing that technology. It is encumbent upon

defendants not to use their strategic dominance to favor their

in-house staffs.”’ Plaintiff's Memorandum at 47. This asser-

tion is totally without merit and amounts to stating that

'! The patent laws guarantee a patentee the right to ‘exclude

others from making, using, or selling the invention throughout the

United States.’’ 35 U.S.C. § 154.

B27

although defendants have invested substantial capital in

creating their own in-house inventors, this house staff should

not receive any special consideration and should be forced to

compete against itself! In other words, plaintiffs want to

compete against defendants’ house inventors upon the condi-

tion that the latter do so with one hand tied behind their

backs. The Supreme Court has already noted thirty years ago

that

The development of patents by separate corporations

or by cooperating units of an industry through an orga-

nized research group is a well known phenomenon. How-

ever far advanced over the lone inventor’s experimenta-

tion this method of seeking improvement in the practices

of the arts and sciences may be, there can be no objec-

tion, on the score of illegality, either to the mere size of

such a vroup or the thoroughness of its research.

United States ve. Line Material Co., 333 U.S. 287, 310, 68

S.Ct. 550, 562, 92 L.Ed. 701 (1948).

IV. WHETHER PLAINTIFF'S LACK STANDING

[t is now clear that not every economic injury to a competi-

tor will give rise to a colorable antitrust violation. In Hawaii

rn Standard Oil Company of California, 405 U.S. 251, 92

S.Ct. 885, 31 L.fd.2d 184 (1972), the Supreme Court stated

that “[t]he lower courts have been virtually unanimous in

concluding that Congress did not intend the antitrust laws to

provide a remedy in damages for all injuries that might con-

ceivably be traced to an antitrust violation.”’ 405 U.S. at 263,

n.l4, 92 S.Ct. at 891-892, n.14. Furthermore, it should be

remembered that the antitrust laws exist to protect competi-

tion and not competitors. Brunswick Corp. v. Pueblo Bowl-O-

Mat, Ine., 429 U.S. 477, 488, 97 S.Ct. 690, 50 L.Ed.2d 701

(1977); Brown Shoe Co, v. United States, 370 U.S. 294, 320,

82 S.Ct. 1502, 8 L.Ed.2d 510 (1962). See also R. H. Bork,

B28

supra, at 58. By not receiving royalties for the use of their in-

ventions, plaintiffs are undoubtedly denied the ‘‘profit’’

which they claim is the only incentive for innovation. But as

one commentator has remarked:

All investments are uncertain, all involve risks, and all

would be increased if they were made more

remunerative. A rational patent system should be able to

identify the unique attributes of investment in ideas

which qualify them for special treatment as opposed to

investment in alternatives.

W.S. Bowman, supra, at 18. Without opining as to whether

the patent system generally undercompensates or overcom-

pensates innovation, it will suffice to observe that seeking: pa-

tent reward is inextricably connected with the economy’s

profit system and necessarily involves uncertainty, “unin-

surable risks,’’ and what has been called a ‘‘moral hazard.”

See W. S. Bowman, supra, at 28. Damages in patent litiga-

tion will necessarily influence not only the cost of engaging in

innovative activity but likewise the costs incurred by society

either in purchasing the fruits of that activity or in being

deprived of access to such fruits. One commentator has

observed, that ‘‘[t]he law lets the marketplace determine the

value of a new invention and protects the right of the patent

owner to receive this value as his reward for his technological

advance.” J. G. Van Cise, Understanding The Antitrust

Laws 187 (1973 ed.).

A. Generally. Section 4 of the Clayton Act, 15 U.S.C. § 15,

reads as follows:

Any person who shall be injured in his business or

property by reason of anything forbidden in the antitrust

laws may sue therefor in any district court of the United

States in the district in which the defendant resides or is

found or has an agent, without respect to amount in con-

troversy, and shall recover threefold the damages by

B29

him sustained, and the cost of suit including a reasonable

attorney's fee.

Taken literally, this language could provide relief to all per-

sons whose injuries were in the least amount causally related

to an antitrust violation. The courts, however, have refused

to adopt such a broad approach. See, e.g., Loeb v. Hastman

Kodak Co., 183 F. 704 (3d Cir. 1910) (limiting standing under

section 7 of the Sherman Act, predecessor of section 4 of the

Clayton Act). Cf. Southern Pacific Co. v. Darnell-Taenzer

Lumber Co., 245 U.S. 531, 534, 38 S.Ct. 186, 62 L.Ed. 451

(1918). See also L. Green, The Rationale of Proximate Cause

122-23, 195-97 (1927); Polock, The “Injury” and

“Causation” Elements of a Treble-Damage Antitrust Action,

57 Nw.U.L.Rev. 691, 697-700 (1963). As the Ninth Circuit

Court of Appeals has commented:

a measured approach has prevailed; courts have im-

pressed a standing doctrine so as to confine the availabil-

ity of section 4 relief only to those individuals whose pro-

tection is the fundamental purpose of the antitrust laws.

Cf Barlow v, Collins, 397 U.S. 159, 90 S.Ct. 8382, 25

L.Ed.2d 192 (1970); Association of Data Processing ©.

Camp, 397 U.S. 150, 90 S.Ct. 827, 25 L.Ed.2d 184

(1970); Mount Clemens Industries, Inc. v. Bell, 464 F.2d

339, 341-44 (9th Cir. 1972). Unfortunately, no “bright

line” has vet emerged to divine this group, and courts

have formulated varied definitions.

In re Multidistrict Vehicle Air Pollution M. D. L. No. 31, 481

F.2d 122, 125 (9th Cir.), cert. denied, 414 U.S. 1045, 94 S.Ct.

551, 38 L.Ed.2d 336 (1973). The key language in Section 4

has been the phrases ‘‘business or property” and ‘“‘by reason

of,” which provide the twin requirements for standing. First,

a plaintiff must allege an injury to his ‘“‘business or property”

inastrictly commercial sense. See Hawai, supra, 405 U.S. at

264, 92 S.Ct. 885 (the words ‘business or property” refer

B30

to commercial interests or enterprises). Second, a plaintiff

must allege that his injury resulted ‘‘by reason of’’ an an-

titrust violation. Hawaii, supra, 405 U.S. at 263-64, n.14, 92

S.Ct. 885. In approaching these requirements analytically,

courts have tended to adopt one of two methods of analysis:

the ‘direct injury” and the ‘“‘target area” approaches.!? See

'2 The In re Multidistrict court provided a summary as to how

the various circuits had approached this analysis:

We do not mean to imply that each circuit falls neatly into one

of the two pigeonholes. Only the Eighth Circuit and ours, for

example, have consistently followed the ‘‘target area’’ ap-

proach, e.g., Mulvey v. Samuel Goldwyn Productions, 433 F.2d

1073 (9th Cir. 1970); Sanitary Milk Producers v. Bergjans

Farm Dairy, Inc., 368 F.2d 679, 688-689 (8th Cir. 1966)

(Blackmun, J.), and even they have diverged occasionally.

E..g., Perkins v. Standard Oil Co., supra, note 6 [396 F.2d 809

(9th Cir. 1968)]. The First, Third, Sixth and Tenth Circuits on

the other hand, generally apply the test we label “direct in-

jury.” E.g., Reibert v. Atlantic Richfield Co., 471 F.2d 727

(10th Cir. 1973); Kauffman v. Dreyfus Fund, 434 F.2d 727,

732-734 (3d Cir. 1970), cert. denied, 401 U.S. 974, 91 S.Ct.

1190, 28 L.Ed.2d 323 (1971); Volasco Products Co. v. Lloyd A.

Fry Roofing Co., 308 F.2d 383, 394-395 (6th Cir. 1962); Miley

v. John Hancock Mut. Life Ins. Co., 148 F.Supp. 299 (D.Mass.),

aff'd per curiam, 242 F.2d 758 (1st Cir.), cert. denied, 355

U.S. 828, 78 S.Ct. 38, 2 L.Ed.2d 41 (1957). The Second,

Fourth and Fifth Circuits have formulated their own par-

ticular mixtures of the two tests, e.g., Calderone Enterprises

Corp. v. United Artists Theatre Circuit, Inc., 454 F.2d 1292

(2d Cir. 1971); Dailey v. Quality School Plan, Inc., 380 F.2d

484 (5th Cir. 1967); South Carolina Council of Milk Producers,

Inc. v. Newton, 360 F.2d 414 (4th Cir. 1966), although the ap-

proach of the Second more closely resembles the ‘‘direct in-

jury’’ test and that of the Fourth and Fifth, the test of ‘target

area”. The Seventh Circuit’s approach is uncertain, although

it appears closer to “target area’. Compare Sandidge v.

Rogers, 256 F.2d 269 (7th Cir. 1958) with Congress Building

Corp. v. Loew’s, Inc., 246 F.2d 587 (7th Cir. 1957). In ascribing

positions to the various circuits, we have ignored self-

descriptions and have attempted to analyze their actual ap-

proaches.

481 F.2d at 127, n.7.

ee,

B31

generally L. Sullivan, Antitrust § 227 (1977); A. Stickels,

Federal Control of Business: Antitrust Laws § 187 (1972);

Sherman, Antitrust Standing: From Loeb to Malamud, 51

N.Y.U.L.Rev. 374 (1976); Lytle & Purdue, Antitrust Target

Area Under Section 4 of the Clayton Act: Determination of

Standing in Light of the Alleged Antitrust Violation, 25

Am.U.L.Rev. 795 (1976). One court has even adopted the

“zone of interests” standing test to be considered in more

detail infra. Malamud v. Sinclair Oil Corp., 521 F.2d 1142

(6th Cir. 1975).

B. The Direct Injury and Target Area Tests

The direct injury test looks primarily at the relationship

between plaintiff and the alleged antitrust violator. This test

has spawned concern over whether an injury is the direct, in-

direct, consequential or remote result of the alleged violator’s

behavior and has been most recently treated from the

perspective of ‘‘passing-on”’ in the Jllinois Brick decision,

supra. Under the target area test, a court will look at the ef-

fect of the alleged violator’s activities within a particular area

of the economy in which plaintiff claims to have been harmed:

(T]o state a cause of action under the anti-trust laws a

plaintiff must show more than that one purpose of the

conspiracy was a restraint of trade and that an act has

been committed which harms him. He must show that he

is within that area of the economy which is endangered

by a breakdown of competitive conditions in a particular

industry. Otherwise he is not injured ‘“‘by reason”’ of any-

thing forbidden in the anti-trust laws.

Conference of Studio Unions ». Loew's, [ne., 198 F.2d 51,

54-55 (9th Cir. 1951), cert. denied, 342 U.S. 919, 72 S.Ct. 367,

96 L.Ed. 687 (1952). It is obvious that the elements of proof

required will vary depending on which test is applied. The

direct injury test raises the issue as to whether consumers

B32

have standing to use the passing-on argument offensively,

while the target area test presents complications in both iden-

tifying real targets and particular areas of the economy

which are affected.

In Perkins v. Standard Oil Co, of California, 395 U.S. 642,

89 S.Ct. 1871, 23 L.Ed.2d 599 (1969), reh. denied, 396 U.S.

871, 90 S.Ct. 36, 24 L.Ed.2d 126 (1969), the Supreme Court

considered whether ‘‘fourth level” price discrimination was

forbidden under Section 2 of the Clayton Act, as amended by

Section 13 of the Robinson-Patman Act, 15 U.S.C. § 13. The

Supreme Court reversed the Ninth Circuit which had decided

the question in the negative, noting that the direct-indirect

“limitation is wholly an artificial one and is completely un-

warranted by the language or purpose of the Act.” 395 U.S.

at 647, 89 S.Ct. at 1874. The Ninth Circuit has read this opin-

ion (although not speaking directly to Section 4 of the

Clayton Act) as constituting direct support for use of the

target area test instead of the direct injury test. In Jn re

Multidistrict, supra, it said:

To attain standing, a plaintiff must thus allege that the

anti-trust violation injured a commercial enterprise of

the plaintiff in the area of the economy in which the

elimination of competition occurred. Standing is denied,

on the other hand, if the claimant’s commercial activity

occurred outside that area of the economy.

481 F.2d at 128.'° Referring to the target area approach as

being “‘logical and flexible,” 481 F.2d at 128, the court, re-

'3 The Court also considered standing under § 16 of the Clayton

Act:

Any person, firm, corporation, or association shall be en-

titled to sue for and have injunctive relief, in any court of the

United States having jurisdiction over the parties, against

threatened loss or damage by a violation of the antitrust laws

. when and under the same conditions and principles as in-

junctive relief against threatened conduct that will cause loss

B33

versing in part the district court, held that crop farmers did

not have standing to allege that auto manufacturers had con-

spired

(a) To eliminate all competition among the automobile

manufacturers in the research, development, manu-

facture and installation of motor vehicle air pollution

equipment;

(b) To eliminate competition ... in the purchase of

patents and patent rights from other parties cover-

ing motor vehicle air pollution equipment.

481 F.2d at 129. In denying standing under Section 4, the

court noted that:

Perkins therefore clarifies any ambiguity inhering in

Hawaii's failure to adopt expressly either of the two

predominant judicial glosses on the language “‘by reason

of”. By repudiating all those aspects of the ‘direct in-

jury” test that distinguish it from the “target area” ap-

proach, and by embracing and applying the latter, the

Court in Perkins, at least inferentially, impresses its im-

primatur upon the ‘‘target area” approach articulated by

this court: a plaintiff has standing under section 4 of the

Clayton Act if the claimed losses fall ‘‘within that area of

the economy which is endangered by a breakdown of

competitive conditions in a particular industry.” F.¢.,

Mulvey v. Samuel Goldwyn Productions, 433 F.2d 1073

(9th Cir. 1970); Hoopes v. Union Oil Co., 374 F.2d 480,

185 (9th Cir. 1967); Karseal Corp. v. Richfield Oil Corp.,

221 F.2d 358 (9th Cir. 1955); Conference of Studio

Unions v. Loew's, Inc., 193 F.2d 51 (9th Cir. 1951), cert.

denied, 342 U.S. 919, 72 S.Ct. 367, 96 L.Ed. 687 (1952).

A proper application of “by reason of" focuses on

or damage is granted by courts of equity, under the rules

gvoverning such proceedings ... .

15 U.S.C. § 26.

B34

whether the anti-competitive conduct directed against

an area of the economy injured business operations con-

ducted by the claimant in that sector of the economy.

The resulting two-step approach first requires identifica-

tion of the affected area of the economy and then the

ascertainment of whether the claimed injury occurred

within that area.

481 F.2d at 129. Although plaintiffs were denied standing

under the target area test, the Ninth Circuit threw in a foot-

note which spoke to certain other possible plaintiffs:

Examples of plaintiffs falling within one or more of these

markets, as appellants concede, include an alleged inven-

tor and a manufacturer of motor vehicle air pollution

equipment who claim losses from asserted inability to

market their devices.

481 F.2d at 129, n.10.

Plaintiffs Board and Shapiro rely on Jn re Multidistrict as

“clear precedent for [their having] standing in this case.”

Plaintiffs’ Reply Memorandum at 17. They assert that the

words “‘seat belt”’ can be substituted for ‘‘air pollution” in the

above-quoted passage (481 F.2d at 129, n.10), placing plain-

tiffs clearly within the target area. Furthermore, plaintiffs

cite the fact that in In re Multidistrict, even the crop farmers

were found to have standing to seek equitable protection

under Section 16 of the Clayton Act. 481 F.2d at 131. On its

face, In re Multidistrict is a good precedent for plaintiffs to

cite—especially in light of the dictum in footnote 10; however,

the case is of limited value because, on its facts, it did not

analyze in detailed fashion the specific concerns of the

antitrust-patent law interface, an interface which of necessi-

ty impacts upon traditional notions of antitrust standing in

the present case.

The Fourth Circuit’s only decided case on antitrust stand-

ing is South Carolina Couneil of Milk Producers v. Newton,

B35

360 F.2d 414, 418, 419 (4th Cir.), cert. denied, 385 U.S. 934,

87 S.Ct. 295, 17 L.Ed.2d 215 (1966). There, the court held

that where raw milk producers incurred depressed profits as

a result of retailers combining to sell milk as ‘‘loss leaders,”

plaintiffs had incurred an injury sufficient to allow them

standing to sue. The court found plaintiffs to belong to the

appropriate target area which was defined as follows:

If a plaintiff can show himself within the sector of the

economy in which the violation threatened a breakdown

of competitive conditions and that he was proximately in-

jured thereby, then he has standing to sue under section

4,

360 F.2d at 418. Stressing both foreseeability and causation,

the court applied the test in the following manner:

The pivot of decision presently is whether the defend-

ants’ asserted conduct was the proximate cause of the

plaintiffs’ asserted injury. If the damage was merely in-

cidental or consequential, or if the defendants’ antitrust

acts are so removed from the injury as to be only remote-

ly causative, the plaintiffs have not been injured “by

reason of anything forbidden in the antitrust laws” as

contemplated by the Clayton Act.

360 F.2d at 419. While the court found that the combination

harmed the dairy industry as a whole, the absence of privity

among the parties was not a material factor. As appears ob-

vious from the above-quoted material, the Fourth Circuit's

approach to the target area question has been to consider also

the nature of the damage done. But in using words like ‘‘in-

cidental”’ and “‘consequential,’”’ the court shows a willingness

to consider not only the definition of an area and a party's

position within that area, but also the qualitative nature of

that harm as well.!* Such an approach is consistent with the

'4 The Fifth Circuit has developed a two-step approach for focus-

ing on the affected area of the economy. Yoder Bros. v. California-

B36

reasoning in Hawaii, supra, that not every injury traceable

to an antitrust violation must result in damages. 405 U.S.

251, 263, n.14, 92 S.Ct. 885, 31 L.Ed.2d 184. See Stern v.

Lucy Webb Hayes National Training School for Deaconesses

and Missionaries, 367 F. Supp. 536 (D.C.D.C. 1973). Fur-

thermore, it is clear that in assessing the nature of the harm

in light of the intent of the antitrust laws to provide protec-

tion and remedies against certain activities:

[EJach case ... must be carefully analyzed in terms of

the particular factual matrix presented. In making this

factual determination courts must look to, among other

factors, the nature of the industry in which the alleged

antitrust violation exists, the relationship of the plaintiff

to the alleged violator, and the alleged effect of the an-

titrust violation upon the plaintiff. Then, while recoyniz-

ing that breaches of the antitrust laws have effects

throughout society, a court must decide whether this

plaintiff is one ‘‘whose protection is the fundamental

purpose of the antitrust laws.”’

Cromar Co. v. Nuclear Materials & Equip. Corp., 543 F.2d

201, 506 (3d Cir. 1976). See also the conclusion that the

elaboration of the ‘factual matrix’? as proposed in Cromar

“recognizes that § 4 standing analysis is essentially a balane-

ing test comprised of many constant and variable factors and

that there is no talismanic test capable of resolving all § 4

Florida Plant Corp., 537 F.2d 1347 (5th Cir. 1976), cert. denied,

429 U.S. 1094, 97 S.Ct. 1108, 51 L.Ed.2d 540 (1977). See also Hard-

wick v. Nu-Way Oil Co., 443 F.Supp. 940, 944 (S.D.Tex. 1978):

First, the affected area of the economy must be identified.

Second, the court must determine whether the claimed injury

occurred within that area. Yoder Bros. v. California-Florida

Plant Corp., 537 F.2d 1347, 1360 (5th Cir. 1976) (citing In re

Multidistrict Vehicle Air Pollution M. D. L. No. 31, 481 F.2d

122, 129 (9th Cir. 1973), cert. denied Morgan v. Automobile

Mygrs. Ass'n, 414 U.S. 1045, 94 S.Ct. 551, 38 L.Ed.2d 336).

B37

standing problems.” Bravman v. Bassett Furniture Ip-

dustries, Inc., 552 F.2d 90, 99 (3d Cir.), cert. denied, 434 U.S.

$23, 98 S.Ct. 69, 54 L.Ed.2d 80 (1977). See Robbins Flooring,

Inc. v. Federal Floors, Inc., 445 F.Supp. 4, 11 (E.D.Pa. 1977).

In assessing standing from the perspective of litigation in-

volving a proposed patent licensing arrangement, the issues

such as target, directness, and even injury become less tangi-

ble and more susceptible to what the philosophers call

counter-factual reasoning, 7.e., ‘“‘But for X’s activities, |

would have licensed my patent and become rich.” In this pat-

ent case, the “but for” element plays a substantial role, since

plaintiffs are alleging that but for defendants’ royalty-free

second source licensing policy, they would have struck a deal

with one or more of defendants’ suppliers and received the

appropriate royalties.

Pastor v. American Telephone & Telegraph Co., 76 F.Supp.

781 (S.D.N.Y. 1940), is a case similar in many respects to the

instant one. Plaintiff alleged that defendant exercised its

power over the telephone industry so as to “influence and

control the character and specification of apparatus con-

stituting or used in conjunction with subscribers’ stations,

and of any apparatus to be connected thereto.”’ 76 F.Supp. at

782. Plaintiff was a patent owner of an automatic repertory

dial device to be attached to a dial telephone:

The amended complaint alleges that the defendant is

engaged in the telephone business, operating toll

telephone lines which carry upwards of 80% of the long

distance telephone traffic in the United States and that

the defendant controls a group of corporations engaged

in the telephone business and auxiliary fields known as

the Bell System.

76 F.Supp. at 782. Plaintiff alleged that defendant's policies

had “restrained” his sale of devices to the potential market

and had prevented him from marketing the product. In

B38

granting summary judgment for the defendant, the court

noted that the testimony showed that plaintiff never made

any applications to defendant for installation of the device,

and, moreover, none of the devices were even manufactured.

The court phrased the relevant question as follows:

Did the refusal of the defendant to buy plaintiff’s patent

or ask for a license to manufacture devices under his pat-

ent, and its failure to make available to the public a

similar device constitute a restraint of trade? Counsel for

the plaintiff freely acknowledges that the mere refusal of

the defendant to deal with the plaintiff does not con-

stitute a violation of the Anti-Trust Laws, but claims

that the policy against foreign attachments has resulted

in a restraint of trade to the plaintiff's damage. The

argument of counsel seems to be that this policy is

against the spirit of the Anti-Trust Laws, but there is a

failure to show or in fact to allege any specific violation

of a prohibition contained in the Sherman and Clayton

Anti-Trust Acts. In the absence of any such showing,

plaintiff has no cause of action thereunder. LaChappelle

v. United Shoe Machinery Corporation, D.C., 13 F.Supp.

939.

76 F.Supp. at 784. When plaintiffs Shapiro and Board ap-

proached defendants in connection with licensing their

patents, they were told to see the defendants’ suppliers. This

action alone cannot amount to an antitrust violation since

defendants had no obligation to serve as licensees. From the

pleadings, therefore, there has been no allegation that plain-

tiffs here, as in Pastor, manufactured the devices themselves,

were in a position to do so, or found any promoter willing to

do so. Presumably, the failure to find a promoter can be

characterized in either of two fashions: (1) Ford and GM

would not change their policies so as to grant royalties, or (2)

plaintiffs would not accept less money for their invention.

B39

The court in Productive Inventions, Inc. v. Trico Products

Corp., 224 F.2d 678 (2d Cir. 1955), considered the following

question:

Is a patentee who has granted to another an exclusive

license for the term of the patent, upon © royalty basis a

‘yerson * * * injured in his business or property” (within

the meaning of Section 4 of the Clayton Act) so as to

enable him to recover treble damages for loss of royalties

on sales that might have been made by its licensee save

for the antitrust violations of defendant?

224 F.2d at 679. Holding that he was not, the court stated

that

Those harmed only incidentally by antitrust violations

have no standing to sue for treble damages; only those at

whom the violation is directly aimed, or who have been

directly harmed, may recover.

224 F.2d at 679.!5 Although plaintiffs claim that defendants’

actions were ‘‘directly aimed at’’ them, there is no clear

evidence on this matter. The Trico court concluded by

remarking that

any financia] loss suffered by the plaintiff was only in-

cidental to the acts complained of. Here, too, the appel-

15 The court cited approvingly the following passage from the

Ninth Circuit’s opinion in Conference of Studio Unions v. Loew's

Inc., 193 F.2d 51, 55 (9th Cir. 1951):

Such a construction is in accordance with the basic and

underlying purposes of the anti-trust laws to preserve com-

petition and to protect the consumer. Recovery and damages

under the anti-trust law is available to those who have been

directly injured by the lessening of competition and withheld

from those who seek the windfall of treble damages because of

incidental harm.

B40

lant has no standing under the anti-trust laws to com-

plain of the incidental loss of royalties by activities of

Trico, not directed at it.

224 F.2d at 680.

SCM Corp. v. Radio Corporation of America, 407 F.2d 166

(2d Cir.), cert. denied, 395 U.S. 943, 89 S.Ct. 2014, 23

L.Ed.2d 461, reh. denied, 396 U.S. 869, 90 S.Ct. 38, 24

L.Ed.2d 125 (1969), was another case involving the depriva-

tion of royalties. RCA claimed that because of certain ac-

tivities of SCM, RCA was:

‘“... Immediately injured * * *, in that RCA has been

wilfully and maliciously deprived of royalties lawfully

due * * * [under Patent ’539] and has been put to the

burden and expense of defending this law suit.”” Injunc-

tive relief is sought on the theory that RCA has been

prevented from enjoying the full benefits of its patents

and, in effect, would have prospered ‘‘but for’? SCM’s

acts.

RCA contends that SCM’s monopolization “if sue-

cessful” will deprive it of the fruits of licensing, that

‘even if SCM must pay some royalty, if it is the only

available licensee,’ SCM might insist on a smaller royal-

ty, that “if that event comes to pass, RCA would be

‘directly’ injured”; and that RCA seeks only to avoid

threatened loss “‘if the threat materializes’ (RCA reply

brief).

407 F.2d at 170. The court found that RCA had not alleged

any injury sufficient to give it standing to sue, and further-

more, that its loss of royalties was not an injury sustained

because of the plaintiff’s antitrust violations. Jd.

The holding in Midway Enterprises, Inc. v. Petroleum

Marketing Corp., 375 F.Supp. 1339 (D.Md. 1974), would

appear to provide support for plaintiffs’ standing

arguments. The case is valuable in providing a nutshell

B41

»

summary of traditional standing doctrines, but, it is dis-

tinguishable in light of the particular patent context of the in-

stant case. The plaintiff in Midway sought damages and in-

junctive relief for alleged wholesale price fixing. The com-

plaint charged defendant and other suppliers of independent

service stations of conspiring to raise, fix, maintain, and

stabilize the wholesale prices of gasoline in Maryland,

Virginia, and the District of Columbia. As a result of defend-

ant’s alleged activities, plaintiff claimed it was required to

purchase gasoline at excessive prices, and as a direct conse-

quence, suffered losses which led to the destruction of its

business. Defendant’s motion to dismiss for lack of standing

was denied.

In the opinion, the court recognized that “‘[t]he standing re-

quirement is not satisfied merely by proof that some adverse

effect on the plaintiff can be traced to the defendant's

unlawful activity.” 375 F.Supp. at 1341. Noting that the

direct injury test in Loeb v. Eastman Kodak Co., 183 F. 704

(3d Cir. 1910), had been construed to require the plaintiff to

“have direct relations (be in privity of contract) with the

defendant,” 375 F.Supp. at 1341, the opinion reviewed a

number of cases denying standing and concluded that “‘{iJn

each of these cases, the plaintiff was not the party which sut-

fered the immediate injury but whose loss resulted from his

relationship with another entity.” /d. After explaining the

reasons behind the Fourth Circuit’s adoption of the “target

area test’? proposed in Karseal Corp. v. Richfield Cil Corp.,

221 F.2d 358 (9th Cir. 1955), it concluded that, as opposed to

the exaltation of form over substance in the direct injury test,

the target area test, by focusing on the plaintiff’s relationship

to the area of the economy allegedly injured by the defend-

ant, “‘provides a far more logical and flexible tool to analyze

the standing question,” 375 F.Supp. at 1344:

Standing is denied, however, if the plaintiff's business

activity occurs outside that area of the economy. See In

B42

re Multidistrict Vehicle Air Pollution M.D.L. No. 31,

supra. The advantage of the ‘‘target area”’ theory, then,

is that it examines the circumstances surrounding the

purported violation and prevents a defendant from

avoiding the sanctions of the antitrust laws by the simple

expedient of interposing entities between himself and

the plaintiff.

With respect to the facts presented in Midway, the opinion

concluded that

the primary effect of defendant’s alleged practices was

on the gasoline sold by plaintiff and other independent

service stations, which was competitive with that sold by

defendant. The ultimate effect was to eliminate the com-

petitive position of the plaintiff and other independents.

375 F.Supp. at 1344.

Plaintiffs have relied on this case in their opposition to de-

fendants’ standing arguments. They have argued that since

defendants’ suppliers were not harmed by the royalty-free

second source licensing policy, the full impact of defendants’

pricing policies falls upon them. Rather than approach the

question from a direct-indirect labeling perspective, plaintiffs

actually do rely on the target area standard claiming that

they are the only target since the suppliers are left un-

harmed. Conceivably, plaintiffs could argue that unlike

Trico, supra, and the other cases subsequent to Loeb, supra,

which developed the direct injury test, they suffered the im-

mediate and direct injury due to defendants’ pricing policy.

Under a target area test, however, the directness or in-

directness of the injury would be of no consequence; the mere

fact of the injury and that the victim was a target would ap-

pear to suffice. One could, however, suggest that the target

area test itself begs the direct-indirect injury question since

one would have to come to grips with what sort of entity

could, under the circumstances, constitute a target. Query,

B43

for example, as to whether a target amounts to nothing more

than an “‘entity ‘directly’ aimed at” since presumably targets

are not indirectly aimed at with any degree of success. The

vitality of the target area test in its pristine form may be

showing signs of being undermined. See, for example, the

holding in L & H Investments, Ltd. v. Belvey Corp., 444

F.Supp. 1321 (W.D.N.C. 1978), where the court said:

After [NBO Industries Treadway Cos., Inc. ».|

Brunswick [Corp., 523 F.2d 262, 273 (3d Cir. 1975)] it is

apparently not enough that plaintiff stand somewhere in

the threatened sector of the economy; he must also show

that his injury is logically related to the violation. The

emphasis is shifted from proximate causation to an

analysis of the type of antitrust violation alleged and the

anticompetitive effects it is thought likely to produce.

444 F.Supp. at 1324 (empuasis in original). Presumably this

variation of the standard target area test may indicate that

merely alleging injury in fact will be insufficient in the future.

For a critical analysis of standing which recognizes the incon-

sistencies and confusion in the direct injury and target area

tests, see Berger & Bernstein, An Analytical Framework for

Antitrust Standing, 86 Yale L.J. 809, 830, 843 (1977) (‘‘in

practice most courts treat the target area as a test for direct-

ness of injury’’).

A further problem with the target area test is that by its

language, a plaintiff must show that ‘‘he is within that area of

the economy which is endangered by a breakdown of com-

petitive conditions in a particular industry.’’ Conference of

Studio Unions v. Loew’s Inc., 193 F.2d 51, 54-55 (9th Cir.

1951), cert. denied, 342 U.S. 919, 72 S.Ct. 367, 96 L.Ed. 687

(1952). In the present case, it is unclear whether this test can

be applied with any significant meaning. What does it mean,

for example, for plaintiffs to show that they are in an area of

the economy “‘endangered by a breakdown of competitive

B44

conditions” when they are patentees possessing a statutory

monopoly in the first place? They are, by law, placed in the

position of being monopolists who are capable of negotiating

with oligopolists such as Ford or GM (or their suppliers) to ob-

tain the best price for their inventions. The whole concept of

fully competitive conditions must be modified in the patent

context where it would seem that if a patentee has something

of real value, by virtue of his monopoly, he is automatically

placed in a better bargaining position from which to exploit

his product. The overall result is one in which ‘‘the law leis

the marketplace determine the value of a new invention.” J.

G. Van Cise, supra.

C. A New Standard

In Malamud v. Sinclair Oil Corp., 521 F.2d 1142 (6th Cir.

1975), the court found that the investment companies’ allega-

tion that the failure of a supplier to provide the needed

financing for a service station effectively foreclosed their

ability to expand their operations was a sufficient allegation

of injury to entitle plaintiff to standing. Following the

language used by the Supreme Court in Association of Data

Processing Service Organizations, Inc. v. Camp, 397 U.S.

150, 153, 90 S.Ct. 827, 25 L.Ed.2d 184 (1970), the court held

that the test for standing to sue in a private antitrust action is

whether the plaintiff has alleged that the defendant caused

him injury in fact and that the interest sought to be protected

by the plaintiff is arguably within the zone of interests pro-

tected by the antitrust laws. 521 F.2d at 1151. While the case

provides a useful summary of previous standing doctrines, its

reliance on Data Processing is surprising since no other case

in the intervening five years had even raised the possibility of

a zone of interests test outside of the administrative context

in which Data Processing arose. See, e.g., Sherman, Antitrust

B45

Standing: From Loeb to Malamud, 51 N.Y.U.L.Rev. 374, 378

(1976).

The Malamud court first explored standing as part of the

general concept of justiciability, i.e., as a means of controlling

access to the federal courts. To meet these requirements,

there must be a showing of injury in fact in order to satisfy

the Constitution’s case or controversy provision. U.S. Const.

art. IIT, § 2. Additionally, standing allowed the courts some

leeway in determining whether a given plaintiff is ‘‘the

proper litigant in a suit.’’ 521 F.2d at 1147. To accomplish

this, the court should assess “‘ ‘the party seeking to get his

complaint before a federal court and not on the issues he

wishes to have adjudicated .’ ” Id., citing Flast v. Cohen, 392

U.S. 83, 89, 88 S.Ct. 1942, 20 L.Ed.2d 947 (1968). On these

yrounds, however, the court rejected the current approaches

to standing as being inadequate. Expressing dissatisfaction

with the traditional standing doctrine, the opinion stated:

As we see it ... by using either approach a court is en-

abled to make a determination on the merits of a claim

under the guise of assessing the standing of the claim-

ant. Under either theory the entire question of direct-

ness is one that must be resolved upon some factual

showing, but standing is a preliminary determination or-

dinarily to be evaluated upon the allegations of the com-

plaint. ...

[d, at 1150 (emphasis in original) (footnote omitted).

The Sixth Circuit’s promulgation of the zone of interests

test in Malamud has been criticized on a number of grounds.

See generally, Sherman, supra, and Lytle & Purdue, An-

fitrust Target Area Under Section 4 of the C layton Act; Deter-

mination of Standing in Light of the Alleged Antitrust Viola-

fion, 25 Am.U.L.Rev. 795 (1976). First, the zone of interests

standard articulated in Data Processing must be confined to

its original context, namely, that of administrative standing.

B46

The test was not intended by the Supreme Court to apply

across the board to all standing issues, and Sherman has

referred to its use by the Malamud court as an ‘‘unwarranted

excursion into the law of administrative standing.” 51

N.Y.U.L.Rev. at 405. Administrative cases, unlike most

private antitrust litigation, rarely seek damages, hoping in-

stead to obtain injunctive relief. This likelihood of damages—

automatically trebled in the antitrust context, 15 U.S.C. §

15—presents the substantial possibility of ‘overkill’,

Calderone Enterprises Corp. v. United Artists Theatre Cir-

cuit, Inc., 454 F.2d 1292 (2d Cir. 1971), cert. denied, 406 U.S.

930, 92 S.Ct. 1776, 32 L.Ed.2d 132 (1972), especially when

the maintenance of private antitrust actions brought by

“private attorneys general” allegedly acting in the public in-

terest poses the increased likelihood of windfall recoveries.

To quote Sherman:

By equating administrative standing with antitrust

standing, the Malamud court thus failed to heed Pro-

fessor Scott’s sound advice that “‘to understand the func-

tions of the doctrine, it is necessary at the outset to

distinguish the different contexts in which an issue of

standing is said to arise.” (Citing Scott, Standing in the

Supreme Court—A Functional Analysis, 86 Harv.

L.Rev. 645, 646 (1973)).

51 N.Y.U.L.Rev. at 378. Focusing on the economic and policy

differences presented in the present case distinguishes it

from Midway, supra, and supports a denial of standing.

Moreover, even under a zone of interests test, it is by no

means certain that plaintiffs would have standing, since the

test explicitly invited consideration of the interests at stake

in light of the particular statutory or constitutional guarantee

being invoked. 397 U.S. at 153, 90 S.Ct. 827.

The Supreme Court has recently observed that ‘‘{a]lthough

standing in no way depends on the merits of the plaintiff's

B47

contention that particular conduct is illegal ... it often turns

on the nature and source of the claim asserted.” Warth v.

Seldin, 422 U.S. 490, 500, 95 S.Ct. 2197, 2206, 45 L.Ed.2d

343 (1975). The Malamud court ignored considerations such

as these. Given the possibility of treble damages should the

plaintiff prevail, one can readily understand that even from

the outset, the in terrorem effect of an antitrust complaint

has a settlement value to the plaintiff ‘out of any proportion

to its prospect of success at trial so long as he may prevent

the suit from being resolved against him by dismissal or sum-

mary judgment.”’'® 421 U.S. at 740, 95 S.Ct. at 1927.

D. The Standing Tests and This Case

Any final determination as to standing will necessarily turn

on the question of the remoteness of the alleged injury, /.e.,

the relationship between the alleged antitrust violation and

the injury inflicted on plaintiffs. Such a determination must

consider not only the policies behind allowing recovery under

the antitrust laws but also the complicated interrelationships

which arise when antitrust and patent law are presented in

'© The quotation is from Mr. Justice Rehnquist’s opinion in Blue

Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44

L.Ed.2d 539 (1975), in which the Court upheld the Birnbaum rule

limiting private damages for violations of rule 10b-5, 17 C.F.R. \)

240.10b-5 (1975), to purchasers and sellers of securities. Although

the context of private antitrust litigation obviously differs from

that presented in Blue Chip Stamps, the analogy is a fitting one

since it indicates that policy considerations frequently shape a

court’s evaluation of standing arguments. The Birnbaum rule had,

in fact, been criticized as being ‘‘an arbitrary restriction which un-

reasonably prevents some deserving plaintiffs from recovering

damages which have in fact been caused by violations of Rule

10b-5.”" Id. at 738, 95 S.Ct. at 1926. The Court went on to hold that

such a limitation was based on “countervailing” policy considera-

tions. Id. at 739, 95 S.Ct. 1917.

B48

the same claim. Plaintiffs have the burden of showing (1) that

an antitrust violation occurred, and (2) that they were within

the “target area’ of the anticompetitive activity. See

Calderone Enterprises Corp. v. United Artists Theatre Cir-

curt, Inc., 454 F.2d 1292 (2d Cir. 1971, cert. denied, 406 U.S.

930, 92 S.Ct. 1776, 32 L.Ed.2d 132 (1972); Long Island

Lighting Co. v. Standard Oil Co. of California, 521 F.2d

1269, 1274 (2d Cir. 1975), cert. denied, 423 U.S. 1073, 96

S.Ct. 855, 47 L.Ed.2d 83 (1976) (“‘even parties whose injuries

may be both immediate and foreseeable may lack standing to

pursue a private remedy if that injury is indirect or inciden-

tal, or if their business was not in the target area of the

allegedly illegal acts.’’) It will be recalled that in terms of

substantive violations of the antitrust laws, those found in

Parke, Davis and Klor’s were substantially less “‘incidental”’

than those alleged by plaintiffs here.

The alleged antitrust violation must yield an injury which is

“direct”? and not “‘incidental.’”’ See SCM, supra; Flood ».

Kuhn, 312 F.Supp. 404 (S.D.N.Y. 1970). The specifics of the

“target area’’ test have been refined and amplified as a result

of the opinion in Calderone, supra. That case specifically con-

cerned standing under Section 4 of the Clayton Act and in-

volved an action brought by a nonoperating landlord of mo-

tion picture theatres for treble damages against movie

distributors and exhibitors who charged an antitrust con-

spiracy to restrain trade in the distribution and exhibition of

motion pictures throughout the New York metropolitan area.

The Calderone court acknowledged that ‘‘while many remote-

ly situated persons may suffer damages in some degree as the

result of an antitrust violation, their damage is usually much

more speculative and difficult to prove than that of a com-

petitor who is an immediate victim of the violation.” 454 F.2d

B49

at 1295.'? While the court made it clear that a rule of reason

approach to standing under Section 4 of the Clayton Act

should be used, it went on to observe that “‘[a] plaintiff not a

target by virtue of the culpability of its lessee, patentee, fran-

chisee, supplier, customer, or debtor.”’ 454 F.2d at 1296.

Under the Court’s evaluation of the facts of this case, the

injury to plaintiffs Board and Shapiro appears to be both in-

direct and incidental. While they may consider themselves a

‘‘target area,” the impact reaches them only as a result of the

loss of royalties which, in turn, follows from the business

agreement between the licensees (suppliers) and the car

manufacturers. In Plaintiffs’ Reply Memorandum they state

that ‘‘[t]he antitrust injury is to plaintiffs’ licensing business,

not to plaintiffs’ patent.” Plaintiffs’ Reply Memorandum at

25. This is a curious statement, especially in light of the fact

that without any initial patent, plaintiffs would not even have

any license to grant. Furthermore, the bulk of plaintiffs’ com-

plaint as well as their Memorandum opposing defendants’

motions for summary judgment address the issue of the seri-

ous injury done to the market for innovation and their role as

innovators. In light of this relationship between patenting

and licensing, a distinction between the two businesses is un-

tenable. Without being licensed, a patent will yield no return

for the inventor. What plaintiffs seek to prove is that because

of their failure to negotiate a profitable licensing agreement,

they likewise cannot earn a profitable return on their seat

belt retractor patent. The net result, they claim, is injury to

the ‘‘market for innovation.”’ Yet the injury to plaintiffs’ ef-

forts to turn a profit follows from their own unsuccessful

licensing negotiations with defendants’ suppliers. In one

'’ The court proceeds to define a target as “‘a person or business

against which competitive aim is taken. The line is clearly drawn by

requiring that to have standing one must be an object of an an-

titrust conspiracy.” 454 F.2d at 1296 n.2.

B50

sense, their failure indicates the value which the marketplace

establishes for their invention. They did have a monopoly on

the patented product and did not have to license it for free. In

the even that defendants required plaintiffs’ inventions, the

automakers could do one of two things: either pay the royal-

ties demanded or invent around the patent and run the risk of

a possible patent infringement suit. A finding that plaintiffs

lack standing to bring their antitrust claims will have the ef:-

fect of narrowing this case to a more appropriate focus,

namely, the patent infringement count remaining in the

original complaint.

For these reasons, the standing requirements must be nar-

rowly construed, especially in view of the fact that the patent

aspects of this case remove it from the straightforward an-

alysis of standing involved in pure antitrust cases. Also, one

cannot overlook the patent aspects of the case and the corre-

sponding rights which Mr. Justice Clarke found to be ac-

corded the patentee:

It has long been settled that the patentee receives

nothing from the law which he did not have before, and

that the only, effect of his patent is to restrain others

from manufacturing, using, or selling that which he has

invented. The patent law simply protects him in the

monopoly of that which he has invented and has de-

scribed in the claims of his patent. United States v.

American Bell Tel. [Teleph.] Co., 167 U.S. 224, 239, 17

S.Ct. 809, 42 L.Ed.2d 144, 154; Continental Paper Bag

Co. v. Hastern Paper Bag Co., 210 U.S. 405, 424, 28 S.Ct.

748, 52 L.Ed. 1122, 1130; Bawer & Cie v. O'Donnell, 229

U.S. 1, 10, 33 S.Ct. 616, 57 L.Ed. 1041, 1043, 50 L.R.A.,

N.S., 1185, Ann.Cas. 1915A, 150.

Motion Picture Patents Co. v. Universal Film Man ufucturing

Co., 243 U.S. 502, 510, 37 S.Ct. 416, 418, 61 L.Ed. 87]

(1917).

B51

The fact that plaintiffs may be concerned about what hap-

pens to their invention ‘“‘down the line’? does not mean that

whenever they do not like an outcome they can allege an in-

jury. As one commentator has recently observed:

The holder of a patent has no greater power to restrict

the terms upon which a buyer of the patented product re-

sells at the next vertical level than does the owner of any

other product. The patentee can obtain the full reward of

the patent in the first sale; a right to restrict the goods in

more remote channels of trade is not a traditional part of

the patent grant nor is it needed in order for the

patentee fully to enjoy the monopoly of the patent.

L.A. Sullivan, Antitrust 572 (1978). See also United States ».

Univis Lens Co., 316 U.S. 241, 62 S.Ct. 1088, 86 L.Ed. 1408

(1942), where Chief Justice Stone, writing for the Court, said:

Our decisions have uniformly recognized that the pur-

pose of the patent law is fulfilled with respect to any par-

ticular article when the patentee has received his reward

for the use of his invention by the sale of the article, and

that once that purpose is realized the patent law affords

no basis for restraining the use and enjoyment of the

thing sold. Adams v. Burke, supra, 17 Wall. 4538, 456, 21

L.Ed. 700; Keeler v. Standard Folding Bed Co., 157 U.S.

659, 15 S.Ct. 738, 39 L.Ed. 848; Motion Picture Co. v.

Universal Film Co., 243 U.S. 502, 37 S.Ct. 416, 61 L.Ed.

871, L.R.A. 1917E, 1187 Ann.Cas. 1918A, 959; and see

cases collected in General [Talking] Pictures Co. +.

[Western] Electric Co., 305 U.S. 124, 128, n. 1, 59 S.Ct.

116, 118, 83 L.Ed. 81. In construing and applying the

patent law so as to give effect to the public policy which

limits the granted monopoly strictly to the terms of the

statutory grant, Morton Salt Co. v. [G.S.] Suppiger Co.,

314 U.S. 488, 62 S.Ct. 402, 86 L.Ed. 363, the particular

form or method by which the monopoly is sought to be

B52

extended is immaterial. The firs! rending of any article

manufactnred under a patent puts the article heyound the

reach of the monopoly which that patent confers. Whether

the licensee sells the patented article in its completed

form or sells it before completion for the purpose of en-

abling the buyer to finish and sell it, he has equally

parted with the article, and made it the vehicle for trans-

ferring to the buyer ownership of the invention with

respect to that article. To that extent he has parted with

his patent monopoly in either case, and has received in

the purchase price every benefit of that monopoly which

the patent law secures to him. [fhe were permitted to

control the price at which it could be sold by others he

would extend his monopoly quite as much in the one case

as in the other, and he would ertend it heyond the fair

meaning of the patent statutes and the construction

which has hitherto been given to them.

316 U.S. at 251-52, 62 S.Ct. at 1094 (Emphasis added). The

theory of recovery advanced by plaintiffs would extend the

scope of their patent monopoly well into the licensing stage,

enabling them to exercise leverage as to the deal eventually

concluded between its licensee (supplier) and the automakers,

obviously an improper result. The success of such a theory

would mean that a patentee could effectively force a form of

resale price maintenance scheme upon parties further down

the line. Such an effect has been held unlawful in Dr. Miles

Medical Co, v. John D. Park & Sons Co., 220 U.S. 373, 31

S.Ct. 376, 55 L.Ed. 502 (1911). Plaintiffs have already indi-

cated their prior acquiescence in a marketing arrangement in

which they voluntarily waived 60% of their royalties. Under

plaintiffs’ conception of their right to be rewarded for innova-

tion, it would seem that anything less than 100% of the full

royalties obtainable would underreward them for their ac-

tivities.

B53

Plaintiffs’ arguments, taken to their logical conclusion,

would mean that they were, in all circumstances, entitled to a

minimum royalty which was equal to what they felt was the

value of their innovation, Anything less would undercompen-

sate them and tend to destroy the “market for innovation.”

Yet it remains clear that a royalty is only one form of com-

pensation or reward allowed an inventor. While it is recog-

nized that patent licenses are generally granted in exchange

for some form of monetary consideration, that remuneration

may be fixed or variable, the latter representing a royalty

form. See generally T. Costner, 14 Business Organiza-

tions—Patents § 3.04[1] (1975). It should also be recalled that

the actual royalty basis arrived at may be the hardest aspect

of coneluding a licensing negotiation. 7d. at § 3.01.18 A

patentee may negotiate for a minimum royalty payment but a

court cannot go beyond the agreement of the parties to

establish a minimum royalty where the parties themselves

fail to provide one. DeStubner vo United Carbon Co., 67

F.Supp. 884 (S.D.W.Va. 1946), aff'd, 163 F.2d 735 (4th Cir.

1947), cert. denied, 334 U.S. 829, 68 S.Ct. 1328, 92 L.Ed.

1757 (1948). Similarly, United States v. General Electric Co.,

272 U.S. 476, 489, 47 S.Ct. 192, 71 L.Ed. 362 (1926), held

that a bargained-for royalty in licensing agreements does not

have to meet a test of reasonableness. [t would seem that ina

setting in) which marketplace economics determine the

ultimate value of a new invention, and where that value is

determined by negotiations freely entered into between the

patentee-owner and the licensee-manufacturer, that a given

'S Some of the factors to be considered in such negotiations are:

the patent’s strength, availability of competing technology, the

cost to develop the invention, the savings (or profit) to be realized,

the cost of the suit, the nature of the license, negotiation costs, the

costs of assembling concomitant technical information for the

licensee, Costs of servicing the agreement, and the licensee’s in-

vestment. T. Costner, supra, at § 3.01.

B54

outcome should not be challenged by the courts, absent, of

course, any clearly prohibited anticompetitive behavior. The

law has already recognized that a licensor is free to exact

from his licensee a price as high as he can get, Brulotte v.

Thys Co., 379 U.S. 29, 33, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964),

and a corollary of this ruling in a free market setting would

be that a licensee should be accorded the right to bargain for

as low a price as he can get, up to and including a zero

royalty.!®

Given the facts of licensing, plaintiffs have not been denied

compensation altogether—merely variable compensation has

been foreclosed to them. The record even shows, by their own

admission, that they have already received some $95,000

from American Safety, including a $25,000 down payment

prior to the termination of this licensing agreement in 1966

before any of plaintiffs’ inventions were marketed. Plaintiffs’

Memorandum at 21. The negotiation of a licensing agreement

is a difficult and often risky enterprise. Parties entering into

such negotiations are not guaranteed any return whatsoever.

What is strange is the way plaintiffs characterize these initial

negotiations with American Safety in 1963:

Although plaintiffs were not happy with the prospect of

losing a large protion [sic] of the potential royalties on

their inventions, they were compelled, as a conditien of

consummating the license agreement with American

Safety in 1965, to relinquish their right to 60% of the

potential royalties based upon procurement of their in-

ventions by automobile companies, including the defend-

ants.

Plaintiffs’ Memorandum at 20 (emphasis added). What do

plaintiffs mean when they say they were compelled to give up

over half of their royalties? There is no evidence or even in-

nuendo that the result of which plaintiffs complain was

'9 See comment by J. G. Van Cise, supra.

B55

anything but the by-product of negotiations freely entered in-

to. Again, the suspicion arises that plaintiffs are upset

primarily because they did not receive more money. Receiv-

ing $95,000 for an invention which was not even marketed

and which was produced by a lawyer and a psychiatrist in

their spare time is not necessarily a return so insufficient as

to deter plaintiffs from ever inventing again.

After the agreement with American Safety was cancelled,

plaintiffs conducted licensing negotiations with Hamill a year

later, in 1967. Once again they agreed to waive some of their

royalties, this time, 50%. By plaintiffs’ own admissions,

however, and as explained to them by Hamill’s attorney, ‘the

burden of paying royalties to plaintiffs and competing with

non-royalty-paying suppliers who would benefit from royalty-

free licenses under plaintiffs’ inventions would be too

heavy.’ Plaintiffs’ Memorandum, at 22. One can interpret

this remark to mean that plaintiffs’ insistence on variable

compensation put them at a competitive disadvantage.

V. CONCLUSION

Commenting on the purposes of standing analysis, Berger

and Berstein note that it is:

designed to narrow this broad class of injured persons to

a subclass of plaintiffs who are deemed proper parties to

sue. The scope of antitrust standing should be deter-

mined by reference to the special problems created by

treble damage actions, such as ruinous or duplicative re-

coveries. The scope of substantive protection should be

determined in each case by analysis of pertinent swbstan-

five antitrust policies.

86 Yale L.J. at 836. They recognize that the “distinction be-

tween direct and indirect injury is arbitrary, even meta-

physical, since all antitrust injuries are ‘direct’ to a greater or

B56

lesser degree.”’ Jd. at 842-43. The real difficulty with these

traditional approaches to standing is their failure to take ac-

count of all aspects of antitrust policy, including the jn fer-

rorem effect of treble damages and “overkill” liability, as

well as relevant economic and social policies. Such a policy

approach to standing analysis must, of necessity, consider

the nature and severity of the alleged injury, the parties in-

volved, and the relationship of all of these to substantive an-

titrust law. Plaintiffs’ recovery in this case, if any, must be

confined to their claim of patent infringement. Having failed

to provide evidence of a conspiracy for purposes of Section 1

of the Sherman Act, they also lack standing by virtue of the

fact that the injury alleged is not one which is cognizable

under the antitrust laws. Given the protections already af-

forded plaintiffs by the patent laws, granting them standing

would enable them to obtain benefits far beyond those pro-

vided by law. By virtue of their patent monopoly, they are

free to negotiate whatever price they can obtain for their in-

vention; however, they cannot invoke the antitrust laws to

guarantee that such a return, if any, approximates even their

minimum expectations.

Thus, in light of the admitted absence of any conspiracy in

this case and because plaintiffs as a matter of law lack stand-

ing to sue as to counts one and two, defendants’ motions for

partial summary judgment as to these counts shall be

granted. The Court expresses no opinion on the claim by

defendants that laches or the statute of limitations bars plain-

tiffs’ action.

Accordingly, it is this 29th day of May 1979, by the United

States District Court for the District of Maryland,

ORDERED:

1. That defendants’ motions for partial summary judg-

ment be, and the same are hereby GRANTED; and

2. That plaintiffs’ motion for partial summary judgment

be, and the same is, hereby DENIED.