Petition — SCM Corp. v. Xerox Corp.
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IN THE
Supreme Court of the United States revas
OCTOBER TERM, 1980
JUN 10 1981
>
SCM CORPORATION,
Petitioner,
XEROX CORPORATION.
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
Of Counsel:
IRA B. GRUDBERG
Davip L. BELT
Jacobs, Jacobs & Grudberg, PC.
350 Orange Street
New Haven, Conn. 06503
JEROME GOTKIN
W. THOMAS FAGAN
Widett, Siater & Goldman, PC.
60 State Street
Boston, Mass. 02109
June 10, 1981
GORDON B. SPIVACK
25 Broadway
New York, N.Y. 10004
(212) 344-8480
Attorney for Petitioner
DAVID H. MARKS
JONATHAN M. JACOBSON
Lord, Day & Lord
25 Broadway
New York, N.Y. 10004
BERNARD J. NUSSBAUM
HAROLD C. HIRSHMAN
Sonnenschein Carlin
Nath & Rosenthal
Suite 8000 Sears Tower
233 South Wacker Drive
Chicago, II]. 60606
itn Oe
Office-Supreme Court. U.S |
QUESTIONS PRESENTED
1. Are purchases of patents exempt from application of the
antitrust laws, by reason of patent law policy, solely
because they are made prior to the emergence of a relevant
product market embodying the patented inventions—even
where (i) hundreds of patents and patent applications are
purchased; (ii) the purchaser is already licensed to practice
the patented inventions; (iii) the purchases are not reasona-
bly necessary to induce continued commercialization of the
patented inventions by the purchaser; (iv) absent the pur-
chases there would have been competition as a result of
sublicenses granted by the patent owner; and (v) the
foreseeable and actual result of the purchases is a persist-
ent, substantial economic monopoly?
2. Are purchases of patents exempt, by reason of patent law
policy, from the rule that the legality of an acquisition
under the antitrust laws may be tested at the time its
anticompetitive effects occur—even where the purchaser
has excluded all competition by enforcing and refusing to
license the purchased patents, thus maintaining a persist-
ent, substantial economic monopoly?
Pursuant to Rule 28.1 of this Court, Petitioner SCM Corporation states
that it has no parent or affiliates; its subsidiaries (other than wholly-owned
subsidiaries) are: Allied/Egry Business Systems, Inc. (a subsidiary of Allied
Paper Incorporated); and Pinturas Ecuatorias, S.A., Distribuidora Ameri-
cana, C.A., Pinturas Centro-Americanas, S.A., Glidden de Honduras, S.A.,
Galvanizadora Centro-Americana, S.A., Compania Agricola Myristica, S.A.
and Pinturas Centro-Americanas Costa Rica, Ltda. (all subsidiaries of
SCM-Glidden International Co.).
TABLE OF CONTENTS
Page
QUBSTIONS PRESENTED ...cccccsccvcsccscccvess i
pe ER Ga Pty) ay rere iv
PP MEY odes becedacesedsndsddveeeseuns 1
RR rr ery et re 2
See EE bad cee ceeanenecnsedeecheens 2
PE Fecckssesiackeecebasucesseieusbaness 2
PES CE cu cbbineceesehaboseaeheusecue
PUD CUI sinc ca cenasvcetécssecsaedcaurtas 7
REASONS FOR GRANTING THE WRIT........... 10
I. In Creating an Exemption From the Antitrust
Laws by Reason of “the policies of the patent
laws,” the Court of Appeals Decided an Impor-
tant Question of Federal Law That Should Be
Us OE Ce SANS vnvcctccsnvecccsecsses 10
II. The Exemption Created by the Court of Appeals
Is Unwarrafited and Conflicts With Applicable
SPeGeeenee Ge Ce NN occ accdveeccecceessenes 13
A. The court of appeals’ decision conflicts with
applicable decisions of this Court governing
TION GHOURBTIORS 200 ccc cccccseccsonseas 13
B. The creation of an implied exemption is un-
necessary to further the policies of the patent
FRO ee EEE eee ee ee 15
iii
Page
C. There is no basis for a distinction between
patent purchases made prior to and those
made subsequent to the emergence of a rele-
vant market embodying the patented inven-
tion; and the distinction disregards the impact
on potential competition ...........60.00e 19
The Decision of the Court of Appeals Conflicts
With Applicable Decisions of This Court Holding
That the Legality of an Acquisition Under the
Antitrust Laws May Be Determined at the Time
Its Anticompetitive Effects Occur.............. 22
ec Bs PT eee ee TT rTeTTTreT rr eTer sree 26
APPENDICES:
A. Opinion of the Court of Appeals .............. la
B. Opinion of the District Court ................. 4la
C. Judgment of the District Court................ 127a
D. May 10, 1979, Opinion of the Court of Appeals . 129a
E. May 18, 1979, Opinion of the District Court .... 133a
F. May 25, 1979, Order of the Court of Appeals... 143a
G. Judgment of the Court of Appeals............. 145a
H. Order of the Court of Anpeals Denying Rehearing 147a
De: ME SUMO 2 snd dvcteeedcvcecweusa vines 149a
iv
TABLE OF AUTHORITIES
CASES: Page
American Tobacco Co. v. United States, 328 U.S. 781
ER err ere rT Tr rr rr errr ree rr 10n
Appalachian Coals, Inc. v. United States, 288 U.S. 344
PEP rer rrr errr rere Tre Te ree 23
B.B. Chemical Co. v. Ellis, 314 U.S. 495 (1942) ...... 12n,
14n, 21n
Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263
(2d Cir. 1979), cert. denied, 444 U.S. 1093 (1980).... 24n
Broadcast Music, Inc. v. Columbia Broadcasting Sys-
wy eS FPR PeTTeRTTT TT riTTrer ; 17
California v. Federal Power Commission, 369 U.S. 482
DR SSCL SCLC SAMEGEMAS RAD ARUS TED SAOR END RESO TAS 14
California Retail Liquor Dealers Ass’n v. Midcal
Aluminum, Inc., 445 U.S. 97 (1980)............. 12n, 14n
Carnation Co. v. Pacific Westbound Conference, 383
SL NS onc ks dd cd Neb oe waedssee saw hanceeds 15n
City of Lafayette v. Louisiana Power & Light Co., 435
Es bane hb 4a knee Vawnds cadepeeen web ks 14n
Connell Construction Co. v. Plumbers Local 100, 421
RR OTT er Tree errr ere Ter err ree 15n
Dawson Chemical Co. v. Rohm & Haas Co., 448 U.S.
SE CaN Dic se ahdses esha vanweneee un es 12n, 16, 24n
Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518
| RRA ae eho re ee ye eae 14n
Diamond vy. Chakrabarty, 447 U.S. 303 (1980) ........ 13
Eastman Kodak Co. v. Southern Photo Materials Co.,
oy oe er cr ere 24n
FMC v. Seatrain Lines, Inc., 411 U.S. 726 (1973) ..... 14
Page
Goldfarb v. Virginia State Bar, 42i U.S. 773 (1975).... 14
Group Life & Health Insurance Co. v. Royal Drug Co.,
QEPUD. Be COD 6 v.cevevacsncescccdawsceneo 12n, 15n
Hanover Shoe, Inc. v. United Shoe Machinery Corp.,
See UES: GRD CHRD 6s vo ncndscenvesacsevastanee 24n
Hecht v. Pro-Football, Inc., 570 F.2d 982 (D.C. Cir.
1977), cert. denied, 436 U.S. 956 (1978)..........6. 24n
Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th
Cir.), cert. denied, 344 U.S. 837 (1952)..........4.. lin, 25
Lorain Journal Co. v. United States, 342 U.S. 143
COPED bcc cecececcccnssesnescccsnbeenaneneen 24n
Mannington Mills, Inc. v. Congoleum Industries, Inc.,
fe £ ct fe oer 18, 23-24n
Moraine Products v. ICI America, Inc., 538 F.2d 134
(7th Cir.), cert. denied, 429 U.S. 941 (1976)......... 18
Motion Picture Patents Co. v. Universal Film Mfg. Co.,
BOD US. FEB CIT 6 cncccasccccsesscccctasadasua 12n
National Broiler Marketing Ass’n v. United States, 436
RE, BOG CIID cin wcccacedessensscaesssncawexnnne 12n
National Gerimedical Hospital & Gerontology Center v.
Blue Cross of Kansas City, No. 80-802 (argued April
, B. | PeerererrTeTrerrrrrrrrrr rrr rr co 12n
National Society of Professional Engineers v. United
Shates, 435 U.S. G79 GADD oc ccccvccsvcssscececous 10, 20
Otter Tail Power Co. v. United States, 410 U.S. 366
CPT a 6k 0 ik nb 609 skeseceesseeeeesnsecauen 15, 15n, 24n
Silver v. New York Stock Exchange, 373 U.S. 341 (1963) = 14,
35, 17
Standard Oil Co. v. United States, 221 U.S. 1 (1911) 10n, 17
vi
Page
Standard Sanitary Mfg. Co. v. United States, 226 U.S.
DULG i Cel Lana ceN skated bescessessceseess 14
Transparent-Wrap Machine Corp. v. Stokes & Smith
Se Mies PE CODED 60 kdb sscesbsescdvecees 12, 12n
United States v. Addyston Pipe & Steel Co., 85 F. 271
(6th Cir. 1898), aff'd as modified, 175 U.S. 211 (1899) —s:18
United States v. Aluminum Co. of America, 148 F.2d
Ee csc pckeev ea ebebb eres 10n, 11, 16
United States v. Besser Mfg. Co., 96 F. Supp. 304 (E.D.
Mich. i951), aff'd, 343 U.S. 444 (1952)............ lin
United States v. Borden Co., 308 U.S. 188 (1939) ..... 14, 17
United States v. Citizens & Southern National Bank, 422
Ee ee 23n
United States v. E.I. duPont de Nemours & Co., 353
ese las ake eeake ee aeaeeee a 9, 11, 22-25
United States v. Griffith, 334 U.S. 100 (1948)........ 10n, 11
United States v. Grinnell Corp., 384 U.S. 563 (1966)... = 21
United States v. ITT Continental Baking Co., 420 U.S.
cael seen span a 6b 0b6 Rhee eee ee 22
United States v. Jerrold Electronics Corp., 187 F. Supp.
545 (E.D. Pa. 1960), aff’d per curiam, 365 U.S. 567
ACE StGtC as UAbEcatanedteNesuebesdendnesee 23n
United States v. Line Material Co., 333 U.S. 287 (1948) 14n
United States v. Masonite Corp., 316 U.S. 265 (1942).. 14n
United States v. Penn-Olin Chemical Co., 378 U.S. 158
SEGMENTS phat RS ae 22
United States v. Philadelphia National Bank, 374 U.S.
te Lbs eee seuceviakeshsnabedins sx 14, 21
United States v. Singer Mfg. Co., 374 U.S. 174 (1963) 14n
Vii
Page
United States v. Southern Pacific Co., 259 U.S. 214
SE 65.550 ke 04s ON eb VARETS hae hae SSL ERAN chReR 11, 23
United States v. Terminal Railroad Ass’n, 224 U.S. 383
EE NADAS GREER ESAWSE SEES SALNG DONE UDR ORORe CSS 24n
United States v. Topco Associates, 405 U.S. 596 (1972). 14n
United States v. United Shoe Machinery Corp., 110 F.
Supp. 295 (D. Mass. 1953), aff’d per curiam, 347 U.S.
De PE 5.5455 60s0SeseeSy A aN becnenbesedeness 1Ca
United States v. United States Gypsum Co., 333 U.S.
Co reer Te er rer Terr reer Te CLE 17
Waiker Process Equipment, Inc. v. Food Machinery &
Chemicul Corp., 382 U.S. 172 (1965) .......0eeeeee 12n
Zenith Radio Corp. v. Hazeltine Research, Inc., 395
be fi SPerrerr rr eer eer err er erie 2in, 24n, 25
CONSTITUTION AND STATUTES:
8 Ge ae ee Se SP rrerrer ee rr 15-16
Sherman Act:
Be Or ie OR os esa ea ed ececonkeceweress passim
| wm Be 8 ot & rere rererrrerrirr rer passim
Clayton Act:
EOD Do Ba Siete DE paccacocccccsscsstesacse 8n
ees BBS Gas OS OP ceccctcccecectvescesovess , ee
Oeteee FT, TS UB, BG csc ccvccsccccsvaccecens passim
BE es ED aoa cacseanrehscsuanaedeweweanen 2
SR a Ce os onc baneedkdede des ebae\eanns see 7
ee ab cn kc cd PRGRe) OSes tee eaberae wee es 16
BP Ses Ee waice cockends cédcebeieseeressedes 18n
ee Ec oo ctuncebcvawbesteses\ 6040 Kanne 18n
42 U.S.C. § 7608 2... crccccccccccvvccvesscvesevees 18n
viii
OTHER AUTHORITIES:
R. NORDHAUS, PATENT-ANTITRUST LAW (1980)....... 21
F.M. SCHERER, THE ECONOMIC EFFECTS OF COM-
PULSORY PATENT LICENSING (NYU Bus. Admin.
PODMORIUED CAPT Ei occ cc vocccscuacvcssbausaveccs 15
Stedman, The Patent-Antitrust Interface, 58 J. PAT. OFF.
BOG YN FOR CHP OU s vccnuvkbvsgethbeseavewnes ears 15
DEPARTMENT OF JUSTICE, ANTITRUST GUIDE CON-
CERNING RESEARCH JOINT VENTURES (1980). ..16, 18, 18n
Hearings on S. 390 Before the Subcomm. on Antitrust
and Monopoly of the Senate Comm. on the Judiciary,
fe eG reer ee 22n
IN THE
Supreme Court of the United States
OCTOBER TERM, 1980
No. ___
>
SCM CORPORATION,
Petitioner,
XEROX CORPORATION.
>
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SCM Corporation respectfully prays for a writ of certiorari
to review the judgment of the United States Court of Appeals
for the Second Circuit in this case, entered on March 12, 1981.
OPINIONS BELOW
The opinion of the United States Court of Appeals for the
Second Circuit (Appendix A, PA la-40a) is not yet officially
reported.' The opinion of the United States District Court for
the District of Connecticut (Appendix B, PA 4la-126a) is
reported at 463 F. Supp. 983.
! The citation “PA ___” refers to the appendix to this petition. The
citations “A ___,” “SA ___” and “E ___” refer to the Joint Appendix in
the court below, a copy of which, together with the parties’ briefs, has been
lodged with the clerk of this Court.
2
JURISDICTION
The judgment of the court of appeals was entered on March
12, 1981. (PA 145a). This Court’s jurisdiction is invoked under
28 U.S.C. § 1254(1).2
STATUTES INVOLVED
Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2, and
Sections 4 and 7 of the Clayton Act, 15 U.S.C. §§ 15, 18, are
set forth in the appendix. (Appendix I, PA 149a-Sla).
STATEMENT
This case involves the monopolization of a major industry
and the exclusion of Petitioner SCM Corporation from the
monopolized market. It is undisputed that, by 1969, Xerox
Corporation had monopoly power in the convenience office
copying market and the plain paper copying submarket. (PA
117a-18a). From 1960 to 1970, Xerox was the only company
marketing plain paper copiers in the United States. (PA 4a). As
late as 1975, Xerox’s share of the plain paper copying market
was 83.7 percent. (E 3797).
Xerox’s monopoly was not based on internally developed
technology. It was based on Xerox’s purchase of hundreds of
patents and patent applications from Battelle Memorial Insti-
tute, at a time when Xerox was already licensed to practice the
patented inventions, when the purchases were unnecessary to
induce Xerox to continue commercializing the inventions, and
when the forseeable result of the purchases was that Xerox
would obtain an economic monopoly. Had Xerox not pur-
chased the patents, Battelle would have granted sublicenses,
ensuring competition in plain paper copying. Instead, by en-
forcing and refusing to license the patents it had purchased,
Xerox was able to maintain a persistent, substantial economic
monopoly.
2 A petition for rehearing, relating to an SCM claim for damages that is not
before this Court, was filed on March 25, 1981, and was denied on June 3,
1981. (PA 37a-40a, 147a-48a).
Statement of Facts
Xerography, the patented process on which plain paper
copying is based, was invented by Chester Carlson in 1937. (PA
4a; A 734-36; E 2867). In 1944, Carlson assigned his patent
rights (and later the patents themselves) to Battelle Memorial
Institute, a non-profit research foundation.’ By 1947, Battelle
had developed the process to the point of commercial feasibil-
ity, generating numerous crucial secondary patents along the
way. (PA Sa; A 792; E 211-18, 316-17, 1251, 1254, 1267, 1486).
It was then that Xerox, at that time called The Haloid Com-
pany, became involved. Originally seeking a license that would
be exclusive for a limited period of three to seven years
following commercialization, in 1947 Xerox instead accepted
the non-exclusive license offered by Battelle. (E 175, 182).
Battelle wanted to preclude a monopoly by Xerox of the
xerographic process. (E 208). Accordingly, in 1948, while
agreeing to allow Xerox’s non-exclusive license to be made
“exclusive,” Battelle required Xerox to seek sublicensees, and
Battelle retained the right to compel Xerox to sublicense.
Xerox accepted the license under these conditions. Under this
1948 license agreement, Xerox was also required to assign to
Battelle any xerographic patents Xerox might obtain. (PA
6a-7a, 31a-32a; A 3577-78, 3585, 3592-94; E 475-78, 496).
By the early 1950’s, Battelle had made additional improve-
ments in the xerographic process that enabled Xerox to market
two xerographic products successfully—the “Copyflo,” which
xerographically printed plain paper copies from microfilm
rolls, and the “Flat Plate Equipment,” which xerographically
prepared plain paper copies and masters for offset copying. By
1956, Xerox was deriving 40 percent of its profits from those
two products. (PA 7a; A 891-93, 2541-43; E 316, 1281-83). The
mechanical elements for a xerographic convenience office cop-
ier were available in 1953, and by 1954, Xerox and Battelle
knew enough to build a commercially viable plain paper copier.
(E 808-09, 1269; PA 7a).
3 Title to the patents was held by Battelle Development Corporation, a
wholly-owned subsidiary of Battelle Memorial Institute.
4
By the mid-1950’s, there was a substantial and growing
business in coated paper convenience office copiers using
processes other than xerography. (E 1677-78, 1771; PA 7a).4
But the xerographic plain paper copying process developed by
Battelle was vastly superior to any of the coated paper proc-
esses. As early as 1953, Xerox believed that “these xerography
inventions [were] so basic and so numerous as to present a
‘once in a lifetime’ opportunity to grasp and maintain domi-
nance uf a vigorous and potentially great new industry.” (E
2339-40, 2762). Plain paper copying offered such certain pros-
pects for success that, by 1953, Xerox valued a non-exclusive
xerographic patent sublicense at $70 million. (PA 7a).
Thus, by 1956, it was reasonably foreseeable that plain
paper copying would develop into its own relevant product
market; and Xerox realized that, if it could purchase the
patents from Battelle and eliminate its sublicensing obligation,
it would have a monopoly—of both the plain paper copying
market and the broader convenience office copying market
(i.e., plain and coated paper office copiers). (PA 7a, 26a,
29a-30a).
That was the context in which Xerox sought and obtained a
new agreement with Battelle—the “1956 Agreement”—that
gave it the power to exclude all competition from plain paper
copying. The 1956 Agreement (1) eliminated Xerox’s obliga-
tion to sublicense and Battelle’s power to compel sublicensing;
(2) gave Xerox immediate title to the four original Carlson
patents (the last of which was to expire in 1961); (3) gave
Xerox an exclusive license through December 31, 1958 on each
of the hundreds of other Battelle patents and patent applica-
tions relating to xerography; (4) gave Xerox the right to
acquire title to those patents and patent applications in 1959;
(5) extinguished Xerox’s obligation to assign to Battelle any
xerographic patents it might obtain; and (6) committed Battelle
to assign all of its future xerographic patents and know-how to
Xerox and to work exclusively for Xerox so long as Xerox
4 The new coated paper convenience office copiers that emerged in the
1950’s included machines from Kodak, 3M and Apeco. (PA 7a-8a). By 1958,
annual sales of coated paper copiers reached $175-200 million. (E 1677).
5
contributed $25,000 in xerographic research funds annually.
(PA 8a-9a; E 334-42).
The 1956 Agreement effected a basic structural change in the
industry: but for the agreement, Battelle would have compelled
sublicensing of the xerographic patents and there would have
been competition—instead of monopoly—in plain paper copy-
ing. (PA 8a, 3Ja, 123a; A 870-72, 4575-77; E 208).
In 1959, pursuant to the executory provisions of the 1956
Agreement, Xerox exercised its right to purchase the 318
existing Battelle patents and 327 patent applications. (PA 9a; A
942-44). In 1960, Xerox purchased from Horizons, Inc., a
contract research firm, the only significant xerographic patents
it did not already own. (A 2793-98; E 769-80). That same year,
Xerox introduced the first plain paper copier, the 914.
Entry into plain paper copying by other companies was
impossible. No one could invent around the patents Xerox had
purchased. Many companies tried, including IBM, which alone
spent $42.8 million in its unsuccessful attempt. (A 1400-02).
During the 1960’s, a number of companies, although denied
entry into plain paper copying, marketed coated paper copiers.
By the mid-1960’s, Petitioner SCM had become the leading
company in the coated paper copying field. (E 1535, 1571,
2824-29).5 Customers had a definite preference for plain paper
copiers, however, because coated paper copies tended to
smudge, crack, smear, fade and sweat; they emitted an odor,
were heavy, difficult to write on, and had a slick feel. (E 1120,
1858-59, 1870). By the late 1960’s, it became impossible to
compete effectively with coated paper alone. (E 1558, 1870). In
the 1970’s, the coated paper copying business was marked by
losses, failures and bankruptcies. (E 2673-74, 3792-94; A
2467-75).
Consumers also suffered from Xerox’s monopolistic control
of plain paper copying. Production was restricted and demand
5 Xerox had no interest in coated paper copying and licensed patents to
other companies, including SCM, with a field of use restriction to coated
paper use only. (A 1191).
6
left unsatisfied. Xerox conceded that, as late as 1969, the
market opportunity for plain paper copiers greatly exceeded
Xerox’s machine population. (A 1302-03; see also E 1672; A
2395-430). Although it used only a small fraction of the
technology it controlled (E 1176, 2678; A 1040), Xerox denied
to others the opportunity to develop unused alternative ap-
proaches to plain paper copying, such as “TESI” and “xero-
printing,” both of which were Battelle inventions purchased by
Xerox (A 836-41, 2076-85; E 799-800). Innovative features,
such as reduction capability and push-button control of paper
length, were not available in Xerox’s copiers until long after
their introduction by coated paper firms. (E 3336-41, 1630-32,
1857, 1872, 2801; see also E 1590-658). Xerox’s products were
poorly designed and unreliable. (E 365-66, 387, 392-93, 1117,
1690-92; A 1540-41). As one of Xerox’s top executives admit-
ted, “[Xerox’s] design skills were not the best,” but “[bJecause
[Xerox] had this patent protection, any mistake went.” (E
1273).
Because of Xerox’s monopoly, if consumers wanted conven-
ient plain paper copies, “they had to use a Xerox machine,
even if their overall satisfaction with Xerox performance was
marginal.” (E 1117). Therefore, Xerox was able to charge
exorbitant prices—as late as 1972 obtaining a 40-100 percent
premium over coated paper companies even under its “dis-
count” prices for large accounts. (E 1158; see also E 1060,
1239, 1924; : 1256, 1465-66). Xerox also was able to refuse to
sell its plain paper copiers and then to set sales prices, when
finally established, so high as to discourage sales almost
entirely, thus preventing its customers from getting “off the
hook” of Xerox’s highly profitable rental plans, and preclud-
ing others from entering the market by dealing in Xerox
copiers. (E 2770; see also E 81, 1087, 1101, 1709, 1933-34,
2975; A 1554-64, 2425-26). Xerox’s high prices led to enor-
mous profits. From 1960 to 1970, while Xerox was the only
company marketing plain paper copiers in the United States
(PA 4a), its annual gross profits increased from $6 million to
$400 million. By 1975, Xerox’s gross profits exceeded $800
7
million on $4 billion of revenue. (PA 10a). Between 1960 and
1975, Xerox’s gross profits totalled more than $4.8 billion, at
profit margins as high as 80 percent. (E 1231, 2665, 2770,
18-19; A 2173-77, 4203-05).
Xerox believed as early as 1964 that, eventually, the antitrust
laws would require that it license the patents it had purchased.
But Xerox decided to delay licensing as long as possible, “even
up to the point . . . of playing the game of Brinksmanship in
this connection.” (A 1360-67; PA 67a). Thus Xerox consis-
tently denied plain paper patent licenses to everyone. And
when other companies, beginning with IBM in 1970, intro-
duced infringing plain paper copiers, Xerox sued them for
patent infringement. (PA 58a).
SCM spent millions of dollars trying to invent around the
patents Xerox had purchased, but without success. (A 1515-
17). And SCM requested a plain paper copying license from
Xerox every year from 1963 through 1969 and beyond. Its
requests were repeatedly refused. (PA 10a-lla; A 1374-79,
1650-52; E 2680). In 1974, SCM commenced marketing a plain
paper copier. It was sued by Xerox for infringement. (A
2105-08).
Proceedings Below
SCM filed its complaint on July 31, 1973, seeking damages
and equitable relief for antitrust violations. Jurisdiction was
based on 15 U.S.C. § 15 and 28 U.S.C. § 1337. A preliminary
injunction was denied, 1974 Trade Cas. { 75,086 (D. Conn.),
aff'd, 507 F.2d 358 (2d Cir. 1974), and, from June 1977 to
August 1978, the case was tried to a jury—demanded by
Xerox. SCM asserted five claims, only one of which, SCM’s
“1969 exclusion claim,” is in issue here.®
On the 1969 exclusion claim, SCM sought to recover the
damages it suffered by reason of Xerox’s exclusion of SCM
6 Although the record in the trial court was lengthy, almost the entire
record was devoted to issues not before this Court—such as market defini-
tion, market power, causation, damages and SCM’s other claims.
8
from plain paper copying beginning in 1969. SCM contended
that it was commercially feasible to manufacture a plain paper
copier prior to the 1956 Agreement; that, absent the agree-
ment, Xerox would have made and marketed plain paper
copiers under its prior patent license from Battelle; that it was
foreseeable that the agreement would allow Xerox to monopo-
lize a major market; that Xerox in fact monopolized the
convenience office copying and plain paper copying markets
by, among other things, refusing to license the patents it had
purchased; and that, had it not been for the 1956 Agreement,
Battelle would have compelled sublicensing of the xerographic
patents to SCM, among others, by 1969. SCM urged that, on
these facts, Xerox had violated Sections 1 and 2 of the
Sherman Act and Section 7 of the Clayton Act.
The jury, responding to 52 interrogatories during its 38 days
of deliberation, found for SCM on the 1969 exclusion claim.
(PA 47a-49a, 112a-26a). The jury concluded that, by 1969,
Xerox had monopoly power in both the convenience office
copying market and plain pape: copying submarket; that
Xerox had wilfully acquired or maintained its monopoly
power, as a result, among other things, of the 1956 Agreement,
in violation of Section 2 of the Sherman Act; and that the 1956
Agreement was an unreasonable restraint of trade, in violation
of Section 1 of the Sherman Act, and an anticompetitive
acquisition, in violation of Section 7 of the Clayton Act, both
in 1956, when the agreement was made, and in 1969. (PA
113a-15a, 12la-22a).’? The jury found that Xerox had unlaw-
7 The jury’s finding of wilful acquisition or maintenance of monopoly
power was not limited to the 1956 Agreement and Xerox’s refusal to license
the patents it had purchased (PA 14a n.7), but was based on a course of
anticompetitive conduct that included: the subsequent purchase of important
patents from Horizons, Inc., grant-backs of exclusive copier rights in its
non-copier patent licenses, a conspiracy with its foreign affiliates (Rank
Xerox and Fuji Xerox) to divide world markets, a lease-only policy that
precluded development of competition in a secondary market for Xerox
copiers, employee covenants not to compete that enabled Xerox to have
control of 95 percent of the world’s xerographers as late as 1972, and an
unlawful pricing plan—MUP—that coerced some Xerox high volume ma-
chine customers into taking Xerox’s low volume machines. The jury made
specific findings that MUP violated Section 2 of the Sherman Act and
Section 3 of the Clayton Act. (PA 37a, 86a-87a, 120a, 124a-25a; E 109).
9
fully excluded SCM from plain paper copying from 1969 to
1976, and awarded damages, before trebling, of $37.1 million.
(PA 125a-26a).
The district court, without setting aside any of the jury’s
verdicts, directed entry of judgment in favor of Xerox on
SCM’s claim for damages. The court ruled that, even if
Xerox’s conduct violated the antitrust laws, the policies of the
patent laws precluded the imposition of damage liability; the
court did not decide whether SCM was entitled to equitable
relief. (PA 109a-10a).
The court of appeals affirmed, holding that “the policies of
the patent laws preclude the imposition of antitrust liability.”
(PA 30a, 32a). The court held that patent law policy requires
that patent purchases be evaluated by focusing “upon the
market power that will be conferred by the patent in relation to
the market position then occupied by the acquiring party.” (PA
28a). Thus, the fact that Xerox’s patent purchases were made
prior to the emergence of a relevant market embodying the
patented inventions precluded antitrust liability, irrespective of
the jury’s finding that, in 1956, it was reasonably foreseeable
that the result of the purchases would be the monopolization
of a relevant market. (PA 28a-35a). The only basis advanced
for the court’s ruling was its policy determination that a
contrary result would “trample upon the incentives provided
by our patent laws” (PA 30a, 32a, 35a). The court also held
that the policies of the patent laws preclude application of the
rule (e.g., United States v. E.1. duPont de Nemours & Co., 353
U.S. 586 (1957)) that the legality under the antitrust laws of an
acquisition may be tested at the time its anticompetitive effects
occur. (PA 32a-36a). Again, the sole justification for the ruling
was that “[t]o hold otherwise would unduly trespass upon the
policies that underlie the patent law system.” (PA 36a). Having
held that Xerox’s patent purchases were not illegal, the court
determined that Xerox’s refusal to license SCM in 1969 could
not be a basis for antitrust liability, even though “in an
economic sense, [the license refusal] might have been unrea-
sonable” (PA 25a, 30a, 32a). Judge Waterman concurred in the
result.
10
REASONS FOR GRANTING THE WRIT
I. In Creating an Exemption From the Antitrust Laws by
Reason of “the policies of the patent laws,” the Court of
Appeals Decided an Important Question of Federal Law
That Should Be Resolved by This Court
This case deals with the principal evil at which the antitrust
laws are aimed—persistent, substantial economic monopoly.’
The court of appeals did not strive to maximize the policies
underlying both the antitrust laws and the patent laws; instead,
the court held that the patent laws oust the antitrust laws
altogether. Under the decision below, the patent laws supersede
the antitrust laws at the very point where antitrust policy is
strongest—in prohibiting the wilful acquisition and main-
tenance of persistent monopoly power. The important ques-
tions raised by that determination should be reviewed by
granting certiorari in this case.
The court of appeals did not dispute that, but for its view of
the policies of the patent laws, there was an antitrust violation
that caused antitrust injury to SCM. The court found in favor
of Xerox, not on the basis that its conduct was, on balance,
procompetitive—the test of legality under the antitrust laws
(see National Society of Pi fessional Engineers v. United
States, 435 U.S. 679, 688-92 (1978))—but on the basis that the
patent laws preclude the imposition of antitrust liability. (PA
30a, 32a, 36a). Xerox’s conduct was, thus, exempted from
antitrust scrutiny.®
8 See, e.g., Standard Oil Co. v. United States, 221 U.S. 1, 52 (1911);
American Tobacco Co. v. United States, 328 U.S. 781, 813 (1946) (quoting
United States v. Aluminum Co. of America, 148 F.2d 416, 427 (2d Cir.
1945)); United States v. Griffith, 334 U.S. 100, 107 (1948); United States v.
United Shoe Machinery Corp., 110 F. Supp. 295, 345 (D. Mass. 1953), aff'd
per curiam, 347 U.S. 521 (1954).
9 The court of appeals, like the district court, did not disturb any of the
jury’s findings on the 1969 exclusion claim, including the finding that the
anticompetitive effects of Xerox's conduct outweighed any claimed procom-
petitive effects. Consequently, in its present posture, this case does not turn
on disputed facts, and this Court need not review any fact findings.
11
There is no express exemption from the antitrust laws for
purchases of patents, as the court below recognized. (PA
22a).'° Nevertheless, the court of appeals held that patent law
policy shields from antitrust review all purchases of patents
made prior to the emergence of a separate, definable relevant
market embodying the patented invention. Under the court’s
decision, every such purchase is per se lawful, not only at the
tune the purchase is made, but forever. Accordingly, if the
market has not yet emerged at the time of the purchase, the
purchaser may forever refuse to license the patents and use
them to exclude competition—even after wilfully attaining
monopoly power.
The court of appeals’ decision casts aside important doc-
trines of antitrust law. Were it not for “the policies of the
patent laws,” the antitrust laws would require that the jury’s
determination that the 1956 Agreement was unlawful when
made be sustained; for it has long been established that “(t]he
anti-trust laws are as much violated by the prevention of
competition as by its destruction.” United States v. Griffith,
334 U.S. 100, 107 (1948); United States v. Aluminum Co. of
America, 148 F.2d 416, 431 (2d Cir. 1945). (See pp. 19-20,
infra). Were it not for “the policies of the patent laws,” the
antitrust laws would require that the jury’s determination that
the 1956 Agreement was unlawful in 1969 also be sustained;
for it has long been established that antitrust scrutiny of an
acquisition is not limited to the time the acquisition is made.
An acquisition lawful at its inception may violate the antitrust
laws thereafter if it develops a demonstrably adverse effect on
competition. E.g., United States v. E.I. duPont de Nemours &
Co., 353 U.S. 586 (1957); United States v. Southern Pacific
Co., 259 U.S. 214 (1922). (See pp. 22-25, infra).
As the district court observed, “[t]his case presents impor-
tant issues concerning the relationship between the patent laws
10 See Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th Cir.), cert.
denied, 344 U.S. 837 (1952); United States v. Besser Mfg. Co., 96 F. Supp.
304 (E.D. Mich. 1951), aff'd, 343 U.S. 444 (1952).
12
and the antitrust laws.” (PA 4la).'' And the creation of an
exemption from the antitrust laws is the kind of important
question for which this Court has frequently granted review—
particularly where, as here, an exemption has been implied
without any demonstration of a plain repugnancy between the
two statutory schemes.'? (See pp. 13-18, infra).
Review is especially appropriate and timely in this case, for
the court of appeals’ exemption clears the way for long-term
monopolies in new technologies and products. In high techno-
logy industries, purchases of a number of patents may, as here,
exclude competitors from the relevant market for many years
beyond the 17 granted for the first patented invention. The
purchaser may obtain an overwhelming technological advan-
tage over would-be entrants into the industry; and, if the
antitrust laws cannot apply, that advantage can be extended
into a monopoly of indefinite duration. See Transparent-Wrap
Machine Corp. v. Stokes & Smith Co., 329 U.S. 637, 646-47
(1947).
In this case, for example, Carlson invented xerography in
1937 and his first patent was issued in 1940. Yet, by purchasing
hundreds of patents and patent applications pursuant to the
1956 Agreement, Xerox was able to exclude SCM from plain
paper copying in 1969, twenty-nine years after the first patent
issued. Companies such as SCM and IBM spent fortunes in
unsuccessful efforts to invent around the patents Xerox had
1! The importance of the antitrust-patent relationship itself is reflected by
this Court’s grants of certiorari in cases where the two laws have been
perceived to conflict. See, e.g., Motion Picture Patents Co. v. Universal Film
Mfg. Co., 243 U.S. 502 (1917); B.B. Chemical Co. v. Ellis, 314 U.S. 495
(1942); Transparent-Wrap Machine Corp. v. Stokes & Smith Co., 329 U.S,
637 (1947); Walker Process Equipment, Inc. v. Food Machinery & Chemical
Corp., 382 U.S. 172 (1965); Dawson Chemical Co. v. Rohm & Haas Co., 448
U.S. 176 (1980).
12 E.g., National Gerimedical Hospital & Gerontology Center v. Blue Cross
of Kansas City, No. 80-802 (argued April 29, 1981); California Retail Liquor
Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97 (1980); Group Life &
Health Ins. Co. v. Royal Drug Co., 440 U.S. 205 (1979); National Broiler
Marketing Ass'n v. United States, 436 U.S. 816 (1978).
13
purchased. No one ever succeeded in circumventing Xerox’s
“solid wall of patent protection.” (E 1553). If it were not for
the antitrust laws, there would be no other companies market-
ing plain paper copiers even today.!3
By forever foreclosing application of the antitrust laws to
patent purchases made prior to the emergence of a relevant
market, the decision below fosters the needless elimination of
competition in the development of new markets. The conse-
quences of the court of appeals’ decision will become increas-
ingly important as scientific breakthroughs occur in such areas
as genetic engineering, laser technology and electronics, to
name but a few examples, where important new markets and
submarkets will be created. Cf. Diamond v. Chakrabarty, 447
U.S. 303 (1980). Whether the policies underlying the patent
laws require an exemption from the antitrust laws for pur-
chases of patent-based monopolies in developing new indus-
tries, solely because a market may not have emerged when the
purchases are made, is an important question that should be
addressed by this Court.
Il. The Exemption Created by the Court of Appeals Is
Unwarranted and Conflicts With Applicable Decisions of
this Court
A. The court of appeals’ decision conflicts with applic-
able decisions of this Court governing implied exemptions
The decision of the court of appeals conflicts with this
Court’s decisions governing implied exemptions from the anti-
trust laws. This Court has never ruled that patents confer
13 The Federal Trade Commission filed a complaint in 1973 charging Xerox
with monopolization. In 1975, Xerox agreed to a consent order requiring it
to license all its patents in return for nominal royalties. (PA 12a). If it had
not been for the FTC decree, Xerox would still have a complete monopoly
today, forty-one years after the first patent issued.
One of the important patents Xerox purchased from Battelle pursuant to
the 1956 Agreement was a 1970 patent that will not expire until 1987; this
patent was infringed by copiers introduced by Dennison and IBM. (A 2098;
E 2301; SA 199b-c). Another “crucial” purchased patent, which several
machines infringed, was a 1961 patent that did not expire until 1978. (A
2094; E 2291, 2980-84; SA 199b-c).
14
immunity from the antitrust laws. To the contrary, as the Court
unanimously held in Standard Sanitary Mfg. Co. v. United
States, 226 U.S. 20, 49 (1912):
“Rights conferred by patents are indeed very definite and
extensive, but they do not give any more than other rights
an universal license against positive prohibitions. The
Sherman law is a limitation of rights, rights which may be
pushed to evil consequences and therefore restrained.” '4
Because our national policy in favor of competition is so
fundamental,'5 this Court’s decisions “have repeatedly es-
tablished that there is a heavy presumption against implicit
exemptions [from the antitrust laws], United States v. Phila-
delphia National Bank, 374 U.S. 321, 350-351 (1963); Califor-
nia v. FPC, 369 U.S. 482, 485 (1962).” Goldfarb v. Virginia
State Bar, 421 U.S. 773, 787 (1975). No exemption will be
recognized unless there is a “plain repugnancy” between the
antitrust laws and the competing statutory system such that no
reconciliation is possible. FMC v. Seatrain Lines, Inc., 411
U.S. 726, 733 (1973); United States v. Philadelphia National
Bank, 374 U.S. at 350-52; United States v. Borden Co., 308
U.S. 188, 198-200 (1939). Thus, an exemption will be “implied
only if necessary to make [the competing statute] work, and
14 Accord, United States v. Masonite Corp., 316 U.S. 265, 280 (1942)
(“{s]ince patents are privileges restrictive of a free economy, the rights which
Congress has attached to them must be strictly construed so as not to
derogate from the general law beyond the necessary requirements of the
patent statute”); see Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518,
529-31 (1972); United States v. Singer Mfg. Co., 374 U.S. 174, 197 (1963);
United States v. Line Material Co., 333 U.S. 287, 310-11 (1948); B.B.
Chemical Co. v. Ellis, 314 U.S. 495, 498 (1942).
1S The antitrust laws “are the Magna Carta of free enterprise. They are as
important to the preservation of economic freedom and our free-enterprise
system as the Bill of Rights is to the protection of our fundamental personal
freedoms.” California Retail Liquor Dealers Ass’n v. Midcal Aluminum,
Inc., 445 U.S. 97, 110 (1980) (quoting United States v. Topco Associates, 405
U.S. 596, 610 (1972)). In enacting the antitrust laws, Congress “sought to
establish a regime of competition as the fundamental principle governing
commerce in this country.” City of Lafayette v. Louisiana Power & Light
Co., 435 U.S. 389, 398 (1978).
15
even then only to the minimum extent necessary.” Si/ver v. New
York Stock Exchange, 373 U.S, 341, 357 (1963).'¢
This Court's decisions require more than ipse dixit to dem-
onstrate the existence of a plain repugnancy. Yet the court of
appeals relied on no empirical data to support its view that
application of the antitrust laws “would severely trample upon
the incentives provided by our patent laws” (PA 23a, 30a), and
the available empirical data—including the findings in this
case—refute the necessity for an exemption. See F.M.
SCHERER, THE ECONOMIC EFFECTS OF (COMPULSORY PATENT
LICENSING 34, 84-88 (NYU Bus, Admin, Monograph) (1977);
Stedman, The Patent-Antitrust Interface, 58 J. PAT. OFF.
Soc’y 316, 323-24 (1976). Nor did the court of appeals rely on
any of this Court’s opinions. The decision was based only on
the panel’s own unsubstantiated conclusions.
The exemption created by the court below is especially
dangerous because it allows private parties to engage in anti-
competitive conduct unsupervised either by a regulatory agency
or by the constraint of the antitrust laws. E.g., Otter Tail
Power Co. v, United States, 410 U.S, 366, 374 (1973). Where
implied antitrust exemptions are recognized, it is almost invari-
ably in the context of an overriding regulatory scheme with the
supervision of a federal or state agency. In the patent context,
the antitrust laws are the only check on anticompetitive activi-
ties and they must be applied vigilantly to prevent the patent
owner’s conduct from exceeding the limits reasonably neces-
sary to effectuate the purposes of the patent laws.
B. The creation of an implied exemption is unnecessary to
further the policies of the patent laws ‘
There is no “plain repugnancy” between the antitrust laws
and the patent laws to support the exemption created by the
court of appeals. The Constitution gives Congress the power to
16 See, e.g., Group Life & Health Ins. Co, v. Royal Drug Co., 440 U.S,
205, 231-33 (1979); Connell Construction Co, v. Plumbers Local 100, 421
U.S. 616, 625 (1975); Otter Tail Power Co, v, United States, 410 U.S, 366,
372-75 (1973); Carnation Co, v. Pacific Westbound Conference, 383 U.S.
213, 218 (1966).
16
“secur[e] for limited times to. . . inventors the exclusive right
to their. . . inventions” in order to “promote the progress of
science and useful arts” (Art. I, § 8, cl. 8). Thus, the primary
policy underlying the patent laws is that of stimulating inven-
tion, See Dawson Chemical Co, v. Rohm & Haas Co,, 448
U.S. 176, 221 (1980), But the limited grant of exclusivity given
by the patent laws to the inventor to encourage innovation, 35
U.S.C. § 154, need not conflict with the procompetition man-
date of the antitrust laws; for innovation is a goal furthered
not just by the patent laws, but by the antitrust laws as well.
As Learned Hand said in United States v. Aluminum Co, of
America, 148 F.2d 416, 427 (2d Cir, 1945), it is a major premise
of the antitrust laws that “rivalry is a stimulant to industrial
progress; that the spur of constant stress is necessary to
counteract an inevitable disposition to let well enough alone.”
The Department of Justice takes the same position in its recent
ANTITRUST GUIDE CONCERNING RESEARCH JOINT VEN.
TURES 2-3 (1980);
“Competition is both a cause and an effect of new and
improved products and services and more efficient pro-
ductive processes. Competition acts as a spur to en-
courage investment in research, for the firm that fails to
make such investments risks losing business to rivals who
introduce better or cheaper products. Furthermore, the
more competitive the industry, the greater the incentive to
innovate is likely to be, At the same time, investment in
research acts to increase competition, for the successful
innovator gains a competitive advantage over its rivals,
who must then imitate the innovation or develop innova-
tions of their own if they are to keep up in the competitive
race. Antitrust policy strives, therefore, to keep markets
competitive in order to promote innovation, and to en-
courage innovation in order to promote competition.”
The court of appeals’ implied exemption is entirely unneces-
sary to further the purposes of the patent laws because the
policies the patent laws seek to promote are given full expres-
17
sion under the antitrust Rule of Reason, See Silver v. New
York Stock Exchange, 373 U.S. at 360-61; United States v.
Borden Co.,, 308 U.S, at 198. SCM did not contend below that
all purchases of dominant patents were illegal; it simply
urged—as the district court had instructed the jury (A 4513-19,
4527-33; see also A 4422-28, 4461-63, 4549-50)—that such
purchases, including purchases of patents prior to the emer
gence of a relevant market, were subject to the Rule of Reason,
(E.g., SCM’s Reply Brief at 27, quoted by the court of appeals
(PA 28a)).
As this Court held in United States v. United States Gypsum
Co., 333 U.S. 364, 400-01 (1948): “We apply the ‘rule of
reason’ of Standard Oil Co, v. United States, 221 U.S. 1, to
efforts to monopolize through patents as well as in non-patent
fields.” Under the Rule of Reason, when an agreement to
purchase patents eliminates an existing potential for competi-
tion in a reasonably foreseeable economic market, the agree-
ment can be found unreasonable where, as here, it restrains
competition to a degree greater than reasonably necessary to
induce the purchaser to develop and market the product
involved. So applied, the Rule of Reason gives full effect to the
policies of the patent laws, for it allows purchasers of patents
whatever exclusivity is reasonably necessary to induce commer.
cial development. And it also achieves the purposes of the
antitrust laws by preventing those restraints on competition
that are not reasonably necessary to achieve the purposes of
the patent laws. C/. Broadcast Music, Inc. v. Columbia Broad-
casting System, Inc., 441 U.S. 1, 19 (1979),"
The reasonableness of trade restraints has been determined
from the beginning by the standard of reasonable necessity.
17 Contrary to the court of appeals’ assertion (PA 29a), the legality of
patent purchases does not turn, under the Rule of Reason, on the patents’
potential for commercial success; it turns on the degree competition is
restrained in relation to the reasonable need to restrain competition, Nor
does the Rule of Reason condemn purchase agreements that have no
substantial impact on competition, The question in every case is whether
there is a substantial effect on competition, and, if there is, whether the
restraint on competition is reasonably necessary.
United States v. Addyston Pipe & Steel Co., 85 F. 271, 281-82
(6th Cir, 1898), aff'd as modified, 175 U.S, 211 (1899).'* And
the enforcement authorities and the courts have repeatedly
applied the Rule of Reason in determining the legality of
patent-based trade restraints. See Mannington Mills, Inc. v.
Congoleui: industries, Inc., 610 F.2d 1059, 1070-71 (3d Cir.
1979); Moraine Products v. ICI America, Inc,, 538 F.2d 134,
145 (7th Cir.), cert. denied, 429 U.S. 941 (1976); DEPARTMENT
OF JUSTICE, ANTITRUST GUIDE CONCERNING RESEARCH
JOINT VENTURES App. B, at 6-7 (1980).'® Whether the patent
laws are so plainly repugnant to the antitrust laws as to
warrant the exemption created by the court of appeals is an
important question of federal law which this Court should
resolve.
8 CS. 35 U.S.C. § 20%c), 42 U.S.C. § 5908 and 42 U.S.C, § 7608, which
apply a Rule of Reason standard to the Government in the licensing of
federally-owned patents, Under 35 U.S.C, § 209(c), for example, a federal
agency may grant exclusive or partially exclusive licenses on federally-owned
inventions only if: (i) commercial application has not been achieved; (ii)
“exclusive or partially exclusive licensing is a reasonable and necessary
incentive to call forth the investment of risk capital and expenditures to bring
the invention to practical application”; and (iii) “the proposed terms and
scope of exclusivity are not greater than reasonably necessary to provide the
incentive... .”
19 As noted in the Antitrust Guine Conceanina Researcn Jour Ventures, in
1975, the Salk Institute for Biological Studies (a non-profit research founda-
tion) sought a business review letter regarding a proposed licensing program
for its patents and patent applications on the drug somatostatin, Salk lacked
the capability of performing clinical testing for the drug, and therefore
approached several pharmaceutical companies, offering them non-exclusive
licenses for testing and commercial development. The pharmaceutical com-
panies only wanted exclusive licenses and no one accepted the offer, Salk
then asked the Antitrust Division to approve a proposal under which it would
grant non-exclusive licenses, but grant no more than five worldwide licenses.
This limitation on worldwide licenses would expire three years after the first
commercial sale of somatostatin in the United States. Even though the drug
had not been marketed, the Division at first refused to grant a favorable
review because of the anticompetitive potential of the licensee limitation.
However, after learning of Salk's unsuccessful efforts to license non-exclu-
sively, the Division granted a favorable review because the licensee limitation
was reasonably necessary to induce investment by the firms in testing and
developing the drug and because the arrangement limited the power of those
firms to control licensing of the drug to a reasonably brief period.
19
C. There is no basis for a distinction between patent pur-
chases made prior to and those made subsequent to the
emergence of a relevant market embodying the patented
invention; and the distinction disregards the impact on
potential competition
The court of appeals acknowledged that the antitrust laws
“surely” apply to patent purchases made subsequent to the
emergence of a market. (PA 22a-23a). But because the conven-
ience office copying business had not yet become a separate
“market” by 1956, the court of appeals determined that the
1956 Agreement—pursuant to which Xerox purchased hun-
dreds of patents and patent applications, bought up Battelle’s
know-how and eliminated Battelle’s ability to compel subli-
censing—was per se lawful under Sections 1 and 2 of the
Sherman Act and Section 7 of the Clayton Act when the
purchase was made.
There is no justification in antitrust policy for the court of
appeals’ determination. The court’s conclusion that the 1956
Agreement was not illegal disregards the potential competition
that the agreement eliminated.2° No court has ever suggested as
a matter of antitrust policy that the elimination of potential
competition can be ignored because the precise market in
which the effect on competition is measured does not emerge
until a later date.
The importance of ascertaining a relevant market in an
antitrust case is simply to aid in determining the effect on
competition of the agreement at issue. Where the agreement’s
prospective effect on competition is reasonably foreseeable,
and especially where that effect actually occurs, the existence
of a precisely defined market at the time of the agreement is
20 The court below noted that Xerox purchased the patents from an entity
that was not a potential competitor. However, it was established below that,
but for the 1956 Agreement, Battelle would have exercised its power to
compel sublicenses in favor of SCM, among others, by 1969. (PA 123a; A
4575-77). Thus, although Battelle itself was not a potential manufacturing
competitor, it clearly was a source of potential competition. The 1956
Agreement eliminated that potential competition; and, as a result, the 1969
market was monopolized.
20
unnecessary; it is enough to know that the agreement’s effect
on competition will be substantially adverse.
SCM’s injury was suffered, not in 1956, but in 1969, when
Xerox acted to maintain its monopoly power by refusing to
license the patents it had purchased from Battelle. To focus
solely on 1956 is to ignore the impact of the 1956 Agreemerit
on competition. As a matter of antitrust law, the pertinent
inquiry is not what the effect of an agreement is at an isolated
point in time, but what the effect of the agreement is “on
competitive conditions” in the “long-run.” National Society of
Professional Engineers v. United States, 435 U.S. 679, 688-89
(1978). That inquiry cannot ignore the effect of the agreement
on reasonably foreseeable competition, particularly when the
agreement results in the creation and maintenance of persist-
ent, substantial monopoly power.?!
The court of appeals found no basis in a: ‘itrust policy for
conclusively presuming the legality of patent purchases prior to
the emergence of a market; the court’s rule of per se legality
was bottomed only on “the policies of the patent laws.” The
sole rationale advanced by the court of appeals for its distinc-
tion between patent purchases made prior to the emergence of
a market and patent purchases made thereafter was that “to
impose antitrust liability upon Xerox would severely trample
upon the incentives provided by our patent laws” (PA 30a).
But the same reasoning would equally justify an exemption for
all patent purchases, no matter when they are made. Subject-
ing to antitrust scrutiny patent purchases that occur after the
emergence of a relevant market may also diminish economic
incentives.?2
2! By focusing solely on market conditions at the time patents are pur-
chased, the court of appeals would allow a company with a patent on a cure
for cancer, for example, to buy the only significant competing patent as long
as neither product had yet been marketed. The result would be no additional
innovation, and the monopolization of an important new market as soon as
the drugs are sold.
22 The court of appeals rationale proves too much. Virtually every patent
license restriction could be exempted from antitrust scrutiny on the court’s
analysis. Even tying arrangements and closed patent pools could be ap-
21
The court of appeals assumed that, in order to encourage
research investment, it is necessary to conclusively presume the
legality of all purchases of patents prior to the emergence of a
relevant market. The facts of this case demonstrate that the
court’s assumption is incorrect. Xerox, which aiready had a
license to practice the Battelle inventions, and which viewed
plain paper copying’s future as so clearly profitable that it
valued a non-exclusive license at $70 million, would have
produced a commercial copier with or without the monopoly
power acquired as a result of the 1956 Agreement. The 1956
Agreement had nothing to do with investment incentives. As
noted in Xerox’s summation, the “1956 agreement did nothing
to alter the course of Xerox’s continuing R & D efforts.” (A
4313).
The court of appeals found no reason to distinguish between
the economic monopoly obtained through purchases of patents
prior to the emergence of a market and that achieved by an
inventor. (PA 23a & n.9). But one of the basic themes underly-
ing the antitrust laws is that “corporate growth by internal
expansion is socially preferable to growth by acquisition.”
United States v. Philadelphia National Bank, 374 U.S. 321,
370 (1963). And the distinction between “growth... as a
consequence of a superior product,” United States v. Grinnell
Corp., 384 U.S. 563, 570-71 (1966), and growth by acquisition
lies at the very foundation of antitrust policy. See 1 R.
NORDHAUS, PATENT-ANTITRUST LAW § 10 (1980).23 Whether
proved; for those unlawful activities also tend to increase patentee income
and the prohibition of those practices, therefore, arguably—but no more
demonstrably than here—also diminishes the incentives provided by the
patent laws. Cf. B.B. Chemical Co. v. Ellis, 314 U.S. 495, 498 (1942). The
breadth of the court of appeals’ rationale is perhaps best illustrated by the
court’s expression of uncertainty as to whether damage liability can be
imposed for refusing to license illegally pooled patents (PA 25a n.10)—in
sharp contrast with this Court’s holding in Zenith Radio Corp. v. Hazeltine
Research, Inc., 395 U.S. 100 (1969).
23° Xerox did not invent plain paper copying. The xerographic process was
invented by Carlson and brought to commercial feasibility by Battelle. In
determining that Xerox’s monopoly power was acquired unlawfully, the jury
properly rejected Xerox’s contention that its monopoly was achieved by
Xerox’s superior skill. (A 4469-71; SA 831).
22
that distinction can be erased in the patent context is an issue
deserving review by this Court.
Ill. The Decision of the Court of Appeals Conflicts With
Applicable Decisions of This Court Holding That the
Legality of an Acquisition Under the Antitrust Laws May
Be Determined at the Time Its Anticompetitive Effects
Occur
Absent an implied exemption based on the patent laws, even
if the 1956 Agreement had been lawful when it was made, it
clearly became unlawful by 1969, by which time Xerox had
obtained an economic monopoly. Applying the antitrust laws,
the agreement was illegal in 1969 under the established rule
that the legality of an acquisition may be tested, not only at the
time it is made, but also at any later time when the anticom-
petitive consequences of the acquisition have become demon-
strable. Expressing evident dissatisfaction with this rule regard-
less of its context (PA 36a), the court of appeals held that it
could never be applied to patent purchases. The court’s brief
discussion of the issue cited nothing in support of its conclu-
sion. (PA 33a, 36a).
The applicability of the rule that an acquisition may be
found unlawful when its anticompetitive consequences occur is
clearly established under Section 7 of the Clayton Act under
this Court’s decision in United States v. E.I. duPont de
Nemours & Co., 353 U.S. 586, 592, 597, 607 (1957). The
duPont rule was reaffirmed in United States v. Penn-Olin
Chemical Co., 378 U.S. 158, 168 (1964), and United States v.
ITT Continental Baking Co., 420 U.S. 223, 240-43 (1975).24
24 Congress is aware of the duPont rule, and has implicitly endorsed it. Just
last year, Section 7 was expanded to reach acquisitions by and from
individuals and unincorporated firms as well as corporations. Pub. L. No.
96-349, § 6(a), 94 Stat. 1157-58 (1980). The point was raised in opposition to
the bill that, under duPont, “section 7 can be utilized to reach far back into
history. . . .” Hearings on S. 390 before the Subcomm. on Antitrust and
Monopoly of the Senate Comm. on the Judiciary, 96th Cong., Ist Sess. 69-70
(1979). Congress nonetheless passed the bill and extended the reach of
Section 7.
23
The same rule is applicable when acquisitions are challenged
under Sections | and 2 of the Sherman Act. In United States v.
Southern Pacific Co., 259 U.S. 214, 232-33 (1922), for exam-
ple, this Court sustained the Government’s 1914 challenge to
an 1899 stock acquisition over the defense that the acquiring
company had had effective control over the acquired company
since 1870. And in Appalachian Coals, Inc. v. United States,
288 U.S. 344, 378 (1933), this Court ruled that, although the
agreement in issue was not unreasonable at the time it was
made,
“liJf in actual operation it should prove to be an undue
restraint upon interstate commerce, if it should appear
that the plan is used to the impairment of fair competitive
opportunities, the decision upon the present record should
not preclude the Government from seeking the [appropri-
ate] remedy [at such future time].”?5
Even if there were any basis for the court of appeals’
conclusion that application of the Clayton Act’s incipiency
standard under the duPont rule would “unduly trespass upon
the policies” of the patent laws (PA 36a), application of the
doctrine under the Sherman Aci is eminently sound, especially
where, as here, the defendant has obtained an actual monopoly
and is wilfully maintaining it. Only those patent purchases that
unreasonably restrain trade or create a monopoly are con-
demned by Sections 1 and 2 of the Sherman Act. And there is
no empirical support for the proposition that companies will
be deterred from purchasing patents by the prospect that they
might obtain an economic monopoly that could be challenged
in the future under the Sherman Act’s rigorous standard of
proof.6
25. See United States v. Jerrold Electronics Corp., 187 F. Supp. 545, 555-61
(E.D. Pa. 1960), aff’d per curiam, 365 U.S. 567 (1961); United States v.
Citizens & Southern Nat’l Bank, 422 U.S. 86, 143 (1975) (Brennan, J.,
dissenting on other grounds); United States v. E.i. duPont de Nemours &
Co., 353 U.S. at 622 n.14 (Burton, J., dissenting on other grounds).
26 As the Third Circuit has pointed out, “there is a consensus among those
who have considered the question that . . . any incremental increase in
24
The court of appeals acknowledged that, “in an economic
sense, it might have been unreasonable” for Xerox to refuse to
license SCM in 1969, but the court held that the policies of the
patent laws nevertheless rendered the refusal to license lawful.
(PA 32a). Yet Xerox never offered any justification for its 1969
license refusal; and the court did not specify how patent law
policies would be threatened by holding that Xerox violated
the antitrust laws in 1969 when it unreasonably maintained its
monopoly power by refusing to license SCM. Holding that
Xerox acted unlawfully in 1969 by refusing to license other
companies to compete with plain paper copiers—in return for
profitable royalties—would have no adverse impact on any
incentives to invest in innovation.2”? Rather than detrimentally
affecting the patent laws, imposition of liability on Xerox for
its 1969 license refusal would only reaffirm our national
commitment to competition.*
patentee income that might result from permitting licensing schemes that
would otherwise violate the antitrust laws would be unlikely to affect a
patentee’s initial decision to invest in innovative activity.” Mannington Mills,
Inc. v. Congoleum Industries, Inc., 610 F.2d at 1071 (citing authorities).
27. If Sherman Acct liability is imposed in this case, it will only be well after
the time that Xerox’s investment in xerographic research and development
has been recouped many times over. Xerox invested less than $10 million in
xerographic research and development in the 13 years prior to commencing
the marketing of plain paper copiers in 1960; but by 1969, when the jury
found that Xerox had unreasonably excluded SCM, Xerox had already made
$778 million in profits as a result of the patents it had bought from Battelle.
(A 2114-16; E 2665, 3754). Accordingly, Xerox’s 1969 refusal to license
SCM, unlike the license refusal in Dawson Chemical Co. v. Rohm & Haas
Co., 448 U.S. 176, 222-23 (1980), and unlike the refusal to predisclose in
Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979), cert.
denied, 444 U.S. 1093 (1980), cannot be justified by any need to encourage
innovation; and Xerox has not contended otherwise.
28 See Otter Tail Power Co. v. United States, 410 U.S. 366 (1973); Zenith
Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 114-25 (1969);
Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968);
Lorain Journal Co. v. United States, 342 U.S. 143 (1951); Eastman Kodak
Co. v. Southern Photo Materials Co., 273 U.S. 359 (1927); United States v.
Terminal Railroad Ass’n, 224 U.S. 383 (1912); Hecht v. Pro-Football, Inc.,
570 F.2d 982, 992-93 & n.44 (D.C. Cir. 1977), cert. denied, 436 U.S. 956
(1978).
25
In refusing to apply duPont to patent purchases, the court of
appeals said that, “[w]here a company has acquired patents
lawfully, it must be entitled to hold them free from the threat
of antitrust liability for the seventeen years that the patent laws
provide.” (PA 36a). The court’s suggestion that the 17-year
period can never be limited by the antitrust laws is demon-
strably wrong. To take an obvious example, the 17-year protec-
tion is lost when patents are illegally pooled. In such circum-
stances even a good faith infringement suit on a valid patent
may not be maintained; it is an unlawful act of monopolization
for which treble damages may be recovered. E.g., Zenith
Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 114-25
(1969); Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th
Cir.), cert. denied, 344 U.S. 837 (1952). The 17-year period is
simply the maximum beyond which there is never any protec-
tion.
The policy underlying the duPont doctrine is sound. The
anticompetitive effects of an acquisition may not become
demonstrable until well after the acquisition has been consum-
mated. Yet the impact on competition of an acquisition is not
made any less pernicious because the acquisition is old—a fact
no less true when the assets purchased are hundreds of patents
and patent applications.
The only basis even hinted at below for not applying duPont
to patent purchases is the assumption that the patent laws
themselves will effectively limit to 17 years the duration of the
restraint on competition caused by such purchases. (PA 36a).
But that assumption is disproved by the facts of this very case.
The 1956 Agreement enabled Xerox to purchase an insur-
mountable patent position in plain paper copying, which, as
Xerox commented in 1962, would extend into “the indefinite
future.” (E 172). In 1969, when Xerox refused to license SCM,
it had a complete economic monopoly—twenty-nine years after
the first patent issued. The court of appeals’ decision allows
monopolies of indefinite duration to be established and main-
tained. Whether the policies of the patent laws mandate such a
result is a question this Court should address.
26
CONCLUSION
For the reasons stated, this petition for a writ of certiorari
should be granted.
Respectfully submitted,
GORDON B. SPIVACK
25 Broadway
New York, N.Y. 10004
(212) 344-8480
Of Counsel:
IRA B. GRUDBERG DAVID H. MARKS
DAVID L. BELT JONATHAN M. JACOBSON
Jacobs, Jacobs & Grudberg, PC. Lord, Day & Lord
350 Orange Street 25 Broadway
New Haven, Conn. 06503 New York, N.Y. 10004
(203) 772-3100 (212) 344-8480
JEROME GOTKIN BERNARD J. NUSSBAUM
W. THOMAS FAGAN HAROLD C. HIRSHMAN
Widett, Slater & Goldman, PC. Sonnenschein Carlin
60 State Street Nath & Rosenthal
Boston, Mass. 02109 Suite 8000 Sears Tower
(617) 227-7200 233 South Wacker Drive
Chicago, Ill. 60606
June 10, 1981 (312) 876-8000
Appendix A
Opinion of the Court of Appeals
la
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
, =
No. 14—September Term, 1980
(Argued September 17, 1980 Decided March 12, 1981)
Docket No. 79-7017
a
SCM CorPORATION,
Plaintiff-Appellant,
_—V—
XEROX CORPORATION,
Defendant-Appellee.
+
Before:
WATERMAN, FRIENDLY and MESKILL,
Circuit Judges.
a al
Appeal from an order and judgment of the United
States District Court for the District of Connecticut,
Newman, J., dismissing the claims for monetary damages
asserted by the plaintiff in its private antitrust action
brought under the Clayton and Sherman Acts.
Affirmed and remanded.
—
2a
GorpDon B. Spivack, New York, New York
(David H. Marks, Jonathan M. Jacob-
son, Stephen R. Lynch, Lord, Day &
Lord, New York, New York; Ira B. Grud-
berg, David L. Belt, Jacobs, Jacobs &
Grudberg, P.C., New Haven, Connecti-
cut; Jerome Gotkin, W. Thomas Fagan,
Widett, Slater & Goldman, P.C., Boston,
Massachusetts; Bernard J. Nussbaum,
Harold C. Hirshman, Sonnenschein
Carlin Nath & Rosenthal, Chicago, IlIli-
nois, of counsel), for Plaintiff-Appellant.
STANLEY D. ROBINSON, New York, New York
(Milton Handler, Michael Malina, Allen
Kezsbom, Gerald Sobel, Randolph S.
Sherman, Kaye, Scholer, Fierman, Hays
& Handler, New York, New York, Robert
S. Banks, Xerox Corporation, Stamford,
Connecticut, of counsel), for Defendant-
Appellee.
MESKILL, Circuit Judge:
The plaintiff, SCM Corporation (SCM), appeals from
an order entered in the United States District Court for
the District of Connecticut, Jon O. Newman, Judge,
dismissing its claim for monetary damages asserted in this
private antitrust action for injuries sustained as a result of
alleged exclusionary acts committed by the defendant,
Xerox Corporation (Xerox), in violation of §§ 1 and 2 of
the Sherman Act, 15 U.S.C. §§ 1, 2 (1976), and § 7 of the
Clayton Act, 15 U.S.C. § 18 (1976). The trebled amount
3a
of damages calculated by the jury on this claim totalled
$111.3 million. The principal anticompetitive acts alleged
by SCM concerned patent acquisitions made by Xerox.
SCM averred that Xerox’s acquisition of certain patents
and subsequent refusal to license those patents excluded
SCM from competing effectively in a relevant product
market and submarket dominated by Xerox products
that embraced the patented art. Judge Newman ruled
below that a need to accommodate the antitrust and
patent laws precluded damage liability predicated upon
Xerox’s refusal to license its patents; however, he left
open the possibility of granting the plaintiff equitable
relief. Judge Newman certified his order for inierlocutory
review pursuant to 28 U.S.C. § 1292(b) (1976) and, as
developed below, we exercised our discretion under that
section to accept this appeal. Without commenting upon
Judge Newman’s remedial theory, we affirm the denial of
monetary damages in connection with SCM’s exclu-
sionary claim based upon our determination that none of
Xerox’s paterit-related conduct, the only conduct alleged
by SCM to have caused it any harm, contributed to any
antitrust violation.
SCM also appeals from a judgment entered pursuant to
Rule 54(b), 28 U.S.C., Fed. R. Civ. P. 54(b) (1976),
dismissing its claim for monetary damages based upon
injuries sustained as a result of certain marketing pro-
grams it alleged violated § 2 of the Sherman Act and § 3
of the Clayton Act, 15 U.S.C. § 14 (1976). Judge New-
man held that this claim could not support an award of
damages because “the jury [had not been] given a rational
basis for approximating” the damages incurred by SCM.
463 F.Supp. at 1019. We affirm Judge Newman’s deci-
sion.
4a
BACKGROUND
Chester Carlson—The Inventor
In the 1930s, a patent attorney turned inventor, named
Chestor Carlson, invented a process, subsequently called
xerography, that within two decades would revolutionize
the document reproduction industry. The xerographic
process is described in Judge Newman’s opinion below,
reported at 463 F.Supp. 983.
Two adaptations of the xerographic process are particu-
larly relevant to this case. The first is electrofax copying, a
process which involves the reproduction of images on paper
coated with zinc-oxide. The second, xerography in the re-
usable mode, is a more complex process which permits im-
ages to be reproduced on plain paper.
The significance in distinguishing between coated-paper
copying and plain-paper copying is that Xerox, which
later came to control Carlson’s patents and all of the
xerographic improvement patents, agreed to grant li-
censes for coated-paper copying but refused to grant
licenses for plain-paper copying. The result was that from
1960 until 1970, when IBM introduced its first plain-
paper copier, Xerox enjoyed an absolute monopoly in the
plain-paper copying segment of the industry.
Both the plain- and coated-paper copiers were intro-
duced into a market that formerly had been limited to
machines that employed “duplicating” processes as op-
posed to the “copying” processes just described. The
principal duplicating processes then in use were offset,
spirit, and mimeograph, all of which were developed
around the turn of the century. The duplicating processes
all had one common characteristic—they required the
preparation of a master or stencil. Ultimately the copying
machines formed a discrete market in which the duplicat-
Sa
ing machines could not effectively compete; however,
precisely when that even occurred was not determined by
the jury below.
The Carlson-Battelle Relationship
Chester Carlson, from 1940 to 1944, made eighteen
attempts to find a commercial backer for his invention.
Carlson was turned down by IBM on three separate
occasions, two of which involved an offer by Carlson to
sell exclusive rights to all of his patents. Finally, in 1944,
Carlson entered into an agreement with Battelle Memorial
Institute (Battelle), a non-profit research organization
self-described as “in the business of developing and im-
proving technical inventions and in selling the rights
thereon when patented.” Pursuant to this agreement,
Battelle received an exclusive license under Carlson’s
patents; a wholly owned subsidiary, Battelle Development
Corp. was designated as Carlson’s exclusive licensing
agent; and Battelle agreed to pay Carlson forty percent of
any royalties it might receive. Subsequently, Carlson for-
mally assigned his patents to Battelle. Thereafter, Battelle
secured patents covering many improvements it invented
in the xerographic process that would prove to be of vital
importance to the production of an automatic plain-paper
copier.
The Xerox-Battelle Agreements
Between 1944 and 1947 Battelle experienced difficulty,
as had Carlson, in its efforts to secure financial backing.
Carlson and Battelle approached thirty-six companies,
including IBM, but none was sufficiently interested. In
1946 the Haloid Company of Rochester, New York (later
renamed and hereinafter referred to as Xerox) ap-
6a
proached Battelle and offered its assistance in the com-
mercialization of xerography. During the next ten years,
the parties entered into a series of four basic agreements
pursuant to which Xerox acquired complete title to the
Carlson-Battelle patents and exclusive domain over the
plain-paper copying industry. We describe these agree-
ments in some detail.
The first agreement between Xerox and Battelle, exe-
cuted in 1947, denied Xerox the exclusive license it sought
and instead gave it a non-exclusive license covering lim-
ited applications of xerography. Xerox agreed to pay
Battelle an eight percent royalty and to sponsor $25,000
of xerographic research at Battelle a year. The license was
limited to patented inventions that would produce up to
twenty copies of a document. Xerox also agreed to grant
back to Battelle royalty-free rights on any xerographic
patents it might obtain in connection with its own or
sponsored research. Finally, Battelle agreed, as was its
usual practice, not to work for another company in the
xerographic field occupied by Xerox for the term of the
agreement.
The second agreement, executed in 1948, granted
Xerox an exclusive license to the Carlson-Battelle patents,
on the condition that Xerox “use diligent efforts to secure
sublicensees to engage in research, development and com-
mercialization of the inventions and patents” involved.
Additionally, the 20-copy limitation was removed from
the license agreement, affording Xerox more latitude in
its efforts to exploit the commercial potential of xerog-
raphy.
The third agreement, executed in 1951, continued
Xerox’s obligation to use diligent efforts to seek sublicen-
sees, but extended the scope of the license, which under
the 1947 and 1948 agreements had been limited to use in
7a
the United States, to include use worldwide. Additionally,
all remaining limitations on the fields in which Xerox
could practice xerography under the 1948 agreement were
removed.
Before discussing the fourth agreement executed by the
parties in 1956, which is central to SCM’s claims in this
case, it is necessary to describe the circumstances of the
parties and the market at that time. By the early 1950s
Xerox had experienced success in two commercial appli-
cations of xerography. One machine, a flat-plate copier,
which required twenty manual steps and three or four
minutes to produce a single copy, found some market
acceptance for preparing paper masters for offset dupli-
cators. Another machine, the “Copyflo,” a huge machine
weighing approximately one ton, achieved substantial
success in printing microfilm. By 1956, Xerox was deriv-
ing forty percent of its profit from its xerographic prod-
ucts. SCM does not contend that either of these products
found commercial acceptance as convenience office cop-
iers, the product market that SCM claims Xerox domi-
nated for over a decade. Nevertheless, there is evidence in
the record tending to prove that Xerox possessed the
technology in 1955 to manufacture an automatic plain-
paper copier, and that Xerox speculated that the value of
even a non-exclusive license of its xerographic patents was
worth $70 million. Despite its continuing obligation under
the 1948 and 1951 agreements to secure sublicensees,
Xerox turned down license requests from such potential
competitors as IBM, which by then apparently had
formed a different opinion concerning the commercial
feasibility of xerography. Although the record is not clear,
it appears that coated-paper copiers, other than the elec-
trofax (xerographic), had made inroads into the docu-
ment reproduction machine industry by the early 1950s.
8a
These coated-paper copiers included a *‘wet’’ photographic
type process called ‘‘diffusion transfer,’’ marketed by
Apeco, another ‘‘wet’’ process called ‘‘dye transfer,’’ ad-
vanced by Kodak, and a ‘‘dry’’ thermographic process
that used heat-sensitiv: coated paper manufactured by
3M. In 1954 RCA introduced its electrofax machine and
attempted to obtain xerographic licenses from Xerox.
Also in this document reproduction industry in 1956 were
the offset, mimeograph, and spirit machines that by then
had been in use for half a century. (SCM Br. 18-19).' It
was in this context that Xerox entered into its final
agreement with Battelle.
The fourth agreement, executed in 1956, transferred
title to the four basic Carlson-Battelle patents to Xerox
and abrogated Xerox’s sublicensing obligation. In return,
Battelle received 55,000 shares of Xerox stock and a
percentage of Xerox’s profits between 1959 and 1965.
Xerox also received an exclusive license to the remaining
Carlson-Battelle patents, title formally to be assigned on
! SCM did not attempt to define the composition of the relevant
product market in 1956, because SCM did not allege that Xerox’s
conduct at this time was directed at monopolizing the relevant product
market then in existence. The relevant product market, which SCM
claimed Xerox monopolized by 1964, allegedly consisted only of plain-
and coated-paper copiers, and was described as the convenience office
copier market. SCM also argued that plain-paper copiers by 1964
formed a relevant submarket over which Xerox acquired monopoly
control. Xerox on the other hand argued that the relevant product
market included offset, spirit, and mimeograph equipment. In any
event, the jury found the markets suggested by SCM existed in 1969
but not in 1964. In view of SCM’s failure to challenge the jury’s
determination on appeal, we see no reason to disturb the jury’s finding
that the relevant product market and submarket SCM defined did not
exist in 1964,
Thus, we have no clear picture of the relevant product market that
existed in 1956 when Xerox entered into its final agreement with
Battelle that SCM claims violated the antitrust laws.
2 Chester Carlson received 40% of the consideration given Battelle.
9a
January 1, 1959. Additionally, Xerox received the right to
receive all future xerographic patents and know-how
developed by Battelle, provided that Xerox continued to
sponsor research in the amount of $25,000 annually.
Finally, the 1956 agreement eliminated Xerox’s obligation
to assign its own internally developed patents to Battelle.’
On January 2, 1959, the assignment from Battelle to
Xerox of the xerographic improvement patents occurred
pursua't to the terms of the agreement entered into
between the parties in 1956.
Xerox’s International Family of Companies
In 1956 Xerox entered into a joint venture with the
Rank Organisation, a British company, to assist in the
commercial exploitation of xerography everywhere except
the United States and Canada. The agreement created
Rank Xerox, a joint venture. The agreement included a
clause obligating the joint venture to grant Xerox exclu-
sive rights in the United States and Canada to improve-
ment patents it might obtain.‘ The jury found that Rank
was not a potential competitor of Xerox. In any event
there was no agreement that Rank Xerox would not
compete against Xerox in the United States.
In 1960, Rank Xerox formed a separate joint venture
with Fuji Photo Film, a Japanese enterprise. The jury
found that Fuji Photo Film was a potential competitor of
3 In September 1956, Xerox also entered into an agreement with another
research organization named Horizons, Inc. Under the agreement, Hori-
zons granted Xerox non-exclusive licenses under xerographic patents it
had obtained and, like Battelle, agreed to perform xerographic research
exclusively for Xerox. The agreement was renewed in 1960.
4 Xerox received only one grant-back patent which it used in a
commercial product.
10a
Xerox and Rank Xerox. The agreement created Fuji
Xerox. This agreement also contained a grant-back clause
that entitled Xerox to exclusive rights in all countries
except Japan and eight Asian nations to all inventions
Fuji Xerox might make in the xerographic field. There
was no agreement preventing Fuji Xerox from competing
with Xerox in the United States; however, Fuji Xerox was
not licensed under Xerox’s patents in the United States
and thus could not compete in this country in the alleged
plain-paper copier submarket without infringing Xerox’s
patents here. —
In 1969, Xerox purchased an additional one percent of
Rank Xerox’s stock, increasing its stock ownership in the
joint venture to fifty-one percent. Additionally, the grant-
back clause of the joint venture agreement was elimi-
nated.
Xerox Introduces the 914
In March 1960, Xerox made initial deliveries of the 914,
its first automatic plain-paper copier. The 914 was a re-
sounding success. Between 1960 and 1970, Xerox’s reve-
nues rose from $47 million to $1.7 billion; during the same
period its gross profits increased from $6 million to $400
million. By 1975 Xerox’s revenues reached $4 billion and its
gross profits rose to over $800 million.
Xerox enjoyed a complete monopoly in the production
of plain-paper copiers between 1960 and 1970. In 1960
SCM introduced a coated-paper copier that employed a
diffusion transfer process. In 1962 SCM produced an
electrofax coated-paper copier, which infringed some of
Xerox’s patents. Following a brief infringement suit,
Xerox in 1964 granted SCM limited licenses under its
patents to manufacture xerographic coated-paper copiers.
Xerox refused, however, to extend licenses to SCM that
lla
would enable it to manufacture its owi plain-paper cop-
ier. Similar requests were made by SCM in the ensuing
years but repeatedly denied by Xerox. Finally, in 1970,
without obtaining licenses from Xerox, IBM introduced a
plain-paper copier into the market; other companies fol-
lowed IBM’s lead in the early seventies.
Additional Alleged Anticompetitive Conduct of Xerox
a. Employee Covenants Not to Compete
Up until 1970, Xerox imposed upon its employees an
employment condition that in the event they terminated
their employment with Xerox, they could not work for a
competitor for a period of two years. At Xerox’s request,
Battelle imposed a similar restriction on six of its employ-
ees. SCM presented no evidence that it ever attempted to
hire a Xerox or Battelle employee covered by such a
restrictive covenant.
b. MUP and XCP Pricing Plans
In the 1960s Xerox’s only real competition was in the
“low volume” copier market, a market in which coated-
paper copiers could compete because of their relative cost
efficiency at the low-volume usage level. Around 1967
several manufacturers of coated-paper copiers instituted
“volume” or “fleet” pricing plans under which subscrib-
ing customers received discounts based upon the aggre-
gate volume of copies made on all machines used by the
customer.
In 1968 Xerox responded with its own volume pricing
plan entitled the “Machine Utilization Plan” (MUP).
MUP afforded to Xerox customers a discount based upon
the customer’s total volume from both low-volume (an
area in which coated-paper copiers could compete) and
12a
high-volume machines (an area in which coated-paper
copiers could not effectively compete). The MUP plan
was replaced by a similar program, the XCP plan, in
1975. SCM argued that MUP constituted an illegal tying
arrangement that coerced Xerox customers to use Xerox
low-volume machines instead of competitors’ low-volume
copiers to meet minimum volume levels to be eligible for
MUP discounts.
The Federal Trade Commission (FTC) Proceeding
In January 1973 the FTC filed a complaint against Xerox
charging that the company’s conduct had violated § 2 of
the Sherman Act. The FTC sought a decree enjoining
Xerox to license its patents and to sever its relationship with
its affiliated companies. The action was terminated upon
the entry of a consent decree on July 29, 1975 under which
Xerox agreed to license all of its patents in exchange for
nominal royalties and grant-backs of non-exclusive licenses
under all xerographic patents owned by licensees. Thus, as
of July 29, 1975, Xerox’s patents no longer excluded a
potential competitor from the market.
SCM’s Claims and the Decision Below
SCM filed its complaint in this action on July 31, 1973.
Discovery was completed in 1977 and the trial terminated
in 1978 following 215 days in which evidence was pre-
sented and 38 days of jury deliberation. SCM asserted
five claims for monetary damages at trial. See 463
F.Supp. at 986-91. Only two of those claims have been
pursued on this appeal.
13a
a. The 1969 Exclusion Claim
The gist of SCM’s 1969 exclusion claim’ is that by 1969
Xerox had willfully acquired monopoly power in a rele-
vant product market consisting of convenience office
copiers using plain and coated paper and in a relevant
submarket consisting only of plain-paper copiers, and
that Xerox’s conduct excluded SCM from the relevant
market and submarket.
The jury rejected SCM’s argument that the relevant
product market and submarket defined by SCM existed in
1964, but accepted the contention that the market and
submarket so defined existed in 1969. The jury made a
specific finding that the only patent-related conduct of
Xerox causally related to SCM’s claimed injuries under
its 1969 exclusion claim was the 1956 Xerox-Battelle
agreement. The 1956 agreement, therefore, is the only
basis upon which SCM can recover any monetary dam-
$ SCM originally sought to recover damages for financial injuries it
sustained as far back as 1964, the year SCM first requested a license
from Xerox to manufacture its own plain-paper copier.
Since the complaint was filed on July 31, 1973, the period of injury
for which recovery could be sought ordinarily would be governed by
the four-year statute of limitations provided under the antitrust laws,
15 U.S.C. § 15b (1976), and extend back only to July 31, 1969.
Because the FTC instituted a proceeding against Xerox on January 16,
1973, § 16(i) of Title 15 of the United States Code, which tolls the normal
statute of limitations upon the commencement of an FTC proceeding,
extended the period back to January 16, 1969. Finally, Xerox did not
object to including the first two weeks of January, so that January 1, 1969
became the outside date.
SCM asserted, nevertheless, that its injuries sustained in 1964 were
not ascertainable until the FTC proceeding was commenced in 1969
and that, therefore, it was entitled to recovery for losses sustained in
1964. Because of the statute of limitations question, SCM’s claim for
damages prior to 1969 was characterized as a distinct claim—the “1964
Exclusion Claim”—to avoid confusion. SCM has not pursued its 1964
exclusion ciaim on this appeal because the jury found that SCM lacked
the intent, preparedness, and capacity to enter into plain-paper copy-
ing in 1964. Thus, we need not address the statute of limitations issue.
l4a
ages under its 1969 exclusion claims. As Judge Newman
noted below:
SCM cannot predicate damage liability on any non-
patent-related conduct because it neither claimed nor
offered evidence that any such conduct, the post-em-
ployment covenants, for example, caused it any dam-
age. SCM’s entire exclusion damage proof consisted
of the losses suffered by lack of licenses.
463 F.Supp. at 1010.
The jury found that the 1956 agreement constituted an
unreasonable restraint of trade in 1964 and 1969 in
violation of § 1 of the Sherman Act,° and had the
probable effect of substantially lessening competition or
tending to create a monopoly in 1969 in both the conven-
ience office copier market and the plain-paper copier
submarket in violation of § 7 of the Clayton Act.
Upon all of the evidence of Xerox’s alleged anti-com-
petitive conduct, the jury concluded that as of 1969 Xerox
willfully acquired or maintained monopoly power in the
relevant product market and submarket in violation of
§ 2 of the Sherman Act.’ The jury calculated SCM’s
6 The jury rejected SCM’s claim that Xerox had entered into a
concerted refusal to deal with Rank Xerox and Fuji Xerox aimed at
excluding competitors from manufacturing plain-paper copiers world-
wide as of 1964 or 1969.
7 While only Xerox’s patent-related conduct was alleged by SCM to
have caused it any injury, the jury’s finding that Xerox monopolized
the relevant market and submarket in 1969 in violation of § 2 of the
Sherman Act must be presumed to have been based upon the evidence
offered by SCM against Xerox concerning both Xerox’s patent-related
and non-patent-related conduct. The latter category could include the
Horizons Corporation patent acquisition, the grant-backs of licenses
from Xerox’s licensees, the employee covenants not to compete, and
the joint venture agreements entered into between Xerox and the Rank
Organization and Fuji Photo. As Judge Newman observed below,
however, it is likely that the jury primarily relied upon the 1956
Xerox-Battelle agreement as the basis for its § 2 violation finding. See
463 F.Supp. at 1008.
15a
damages under the 1969 exclusion claim at $11.5 million
in lost profits and $25.6 million in lost going concern
value. Trebled, the damages amount to $111.3 million.
The jury found, however, that SCM reasonably could
have avoided all of the 1969 exclusion claim damages by
instituting this action against Xerox earlier.‘
Judge Newman seriously questioned whether any of
Xerox’s conduct had violated any of the antitrust laws.
Judge Newman, however, chose not to disturb the jury
verdicts. Instead, the district court ruled, as a matter of
law, that Xerox’s unilateral refusal to license its patents
was not a basis for a monetary damage award. 463
F.Supp. at 1014-15. Judge Newman opined that this result
was necessary in order to accommodate the antitrust and
patent laws. Jd. He certified his order denying monetary
damages under the 1969 exclusion claim for appeal pur-
suant to 28 U.S.C. § 1292(b) (1976). 463 F.Supp. at 1021.
After remanding the case for further clarification, see 599
F.2d 32, and the district court’s restatement of the ques-
tion certified for interlocutory review, see 474 F.Supp.
589, we exercised our discretionary power by an order
dated May 25, 1979, to accept this interlocutory appeal.
b. The MUP Claim
The jury concluded that Xerox’s MUP constituted an
illegal tying arrangement that violated § 3 of the Clayton
Act, 15 U.S.C. § 14 (1976), as well as an effort by Xerox
to maintain its monopoly power in the relevant market
and submarket in violation of § 2 of the Sherman Act, 15
U.S.C. § 2 (1976). The jury awarded $230,874 to SCM
8 Although we seriously question the appropriateness of applying the
avoidable consequences doctrine to a case such as the one before us,
we need not resolve that issue in light of our holding that the conduct
complained of by SCM did not violate the antitrust laws.
16a
for injuries it sustained as a result of MUP. Judge New-
man set aside the jury’s verdict under the MUP claim on
the ground that the “jury was not given a sufficient basis
from which it could reasonably conclude that the lost
profits claimed by SCM were caused by MUP.” 463
F.Supp. at 1018. The route to appellate review of the
disposition of the MUP claim was found through the
entry of a final judgment on that claim pursuant to Rule
54(b) of the Federal Rules of Civil Procedure.
DISCUSSION
The 1969 Exclusion Claim
SCM argues on this appeal that the economic monop-
oly Xerox achieved through the patents it obtained from
Battelle in 1956 was unlawful. The issue presented on this
appeal in connection with SCM’s 1969 exclusion claim,
however, is not whether any of Xerox’s conduct between
1947 (when it first contacted Battelle) until 1975 (when
Xerox agreed voluntarily to license all of its patents)
violated any of the antitrust laws, but rather, whether any
of Xerox’s conduct during that period caused Xerox to
incur damage liability under the antitrust laws to SCM.
SCM’s damage claim must be predicated upon an “injury
of the type the antitrust laws were intended to prevent
and that flows from that which makes the defendants’
acts unlawful.” Brunswick Corp. v. Pueblo Bowl-O-Mat,
Inc., 429 U.S. 477, 489 (1977); accord, Zenith Radio
Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 114 n.9
(1969); see Areeda, Antitrust Violations Without Damage
Recoveries, 89 Harv. L. Rev. 1127, 1130-37 (1976). SCM
did not contend below that it sustained any injuries other
than by reason of Xerox’s allegedly unlawful patent-re-
lated conduct, and the jury identified the 1956 agreement
17a
as the sole patent-related conduct that caused SCM any
harm. Therefore, only if Xerox’s procurement of the
patents under the 1956 agreement contributed to an
antitrust violation can SCM recover damages under its
1969 exclusion claim.
SCM has argued that Xerox’s acquisition of its patents
and subsequent exercise of the exclusionary power in
them violated the antitrust laws and iniured SCM. Xerox
contends that its acquisition of the patents was lawful and
its decision not to license its patents for plain-paper
copying constituted a lawful exercise of patent power.
Xerox does not dispute that it achieved monopoly power
in the relevant market and submarket by 1969, but
contends that an examination of the circumstances under
which this feat was accomplished reveals the lawfulness
of the monopoly it attained. Our analysis commences
with a review of the relationship between the patent and
antitrust laws.
The patent laws were enacted pursuant to Congress’
authority to “promote the Progress of Science and useful
Arts, by securing for limited Times to . . . Inventors the
exclusive Right to their. . . Discoveries.” U.S. Const.,
Art. I, § 8, cl. 8. That the first patent laws were enacted
at the second session of our first Congress manifests the
importance our founding fathers attached to encouraging
inventive genius, a resource that preved to be bountiful
throughout this nation’s history. The patent laws reward
the inventor with the power to exclude others from
exploiting his invention for a period of seventeen years.
35 U.S.C. § 154 (1976). In return, the public benefits
from the disclosure of inventions, the entrance into the
18a
market of valuable products whose invention might have
been delayed but for the incentives provided by the patent
laws, and the increased competition the patented product
creates in the marketplace. The antitrust laws, on the
other hand, were enacted to protect competition in the
market. The antitrust laws are based upon the fundamen-
tal premise that the public benefits most from a competi-
tive marketplace. Standard Oil Co. v. United States, 221
U.S. 1, 58 (1911); United States v. Aluminum Co. of
America, 148 F.2d 416, 428-29 (2d Cir. 1945).
The conflict between the antitrust and patent laws
arises in the methods they embrace that were designed to
achieve reciprocal goals. While the antitrust laws pro-
scribe unreasonable restraints of competition, the patent
laws reward the inventor with a temporary monopoly that
insulates him from competitive exploitation of his pat-
ented art. When the patented product, as is often the
case, represents merely one of many products that effec-
tively compete in a given product market, few antitrust
problems arise. When, however, the patented product is
so successful that it evolves into its own economic
market, as was the case here, or succeeds in engulfing a
large section of a preexisting product market, the patent
and antitrust laws necessarily clash. In such cases the
primary purpose of the antitrust laws—to preserve com-
petition—can be frustrated, albeit temporarily, by a
holder’s exercise of the patent’s inherent exclusionary
power during its term.
II.
The law is unsettled concerning the effect under the
antitrust laws, if any, that the evolution of a patent
monopoly into an economic monopoly might have upon a
19a
patent holder’s right to exercise the exclusionary power
ordinarily inherent in a patent. Indeed, implicit in Judge
Newman’s decision below is a deep concern over the
uncertain antitrust law implications just such an event
might have had in this case. His thoughtful analysis of the
relationship between the patent and antitrust laws led him
to conclude that “the need to accommodate the patent
laws with the antitrust laws precludes the imposition of
damage liability . . . for a unilateral refusal to license
valid patents.” 463 F.Supp. at 1012-13. Judge Newman
opined that whether or not Xerox’s refusal to license the
patents it acquired under the 1956 agreement transgressed
any provisions of the antitrust laws, monetary damage
liability could not be imposed upon Xerox without se-
riously undermining the patent system. The district
court’s thesis rests on the assumption that despite the
lawfulness of a patent’s acquisition, “[i]n some circum-
stances, [a] refusal to license may be considered a § 2
violation.” 463 F.Supp. at 1012.
SCM has contended that a unilateral refusal to license a
patent should be treated like any other refusal to deal by
a monopolist, see generally Otter Tail Power Co. v.
United States, 410 U.S. 366 (1973); Lorain Journal Co. v.
United States, 342 U.S. 143 (1951); Eastman Kodak Co.
v. Southern Photo Materials Co., 273 U.S. 359 (1927),
where the patent has afforded its holder monopoly power
over an economic market. While, as SCM suggests, a
concerted refusal to license patents is no less unlawful
than other concerted refusals to deal, in such cases the
patent holder abuses his patent by attempting to enlarge
his monopoly beyond the scope of the patent granted
him. See, e.g., Zenith Radio Corp. v. Hazeltine Research,
Inc., supra, 305 U.S. at 118-19; United States v. Singer
Manufacturing Co., 374 U.S. 174, 192-97 (1963); United
20a
States v. Line Material Co., 333 U.S. 287, 314-15 (1948);
Hartford-Empire Co. v. United States, 323 U.S. 386,
406-07 (1945); United States v. Masonite Corp., 316 U.S.
265, 277 (1942). Where a patent holder, however, merely
exercises his “right to exclude others from making, using,
or selling the invention,” 35 U.S.C. § 154 (1976), by
refusing unilaterally to license his patent for its seventeen-
year term, see, e.g., Bement v. National Harrow Co., 186
U.S. 70, 88-90 (1902), such conduct is expressly permitted
by the patent laws. “The heart of [the patentee’s] legal
monopoly is the right to invoke the State’s power to
prevent others from utilizing his discovery without his
consent.” Zenith Radio Corp. v. Hazeltine Research,
Inc., supra, 395 U.S. at 135 (citing Crown Die & Tool Co.
v. Nye Tool & Machine Works, 261 U.S. 24 (1923);
Continental Paper Bag Co. v. Eastern Paper Bag Co.,
210 U.S. 405 (i908)). Simply stated, a patent holder is
permitted to maintain his patent monopoly through con-
duct permissible under the patent laws.
No court has ever held that the antitrust laws require a
patent holder to forfeit the exclusionary power inherent
in his patent the instant his patent monopoly affords him
monopoly power over a relevant product market. In
Alcoa this Court never questioned the legality of the
economic monopoly Alcoa maintained by virtue of the
two successive patents it had acquired. United States v.
Aluminum Co. of America, supra, 148 F.2d at 422, 430.
Indeed, Judge Learned Hand termed Alcoa’s economic
monopoly during the terms of those patents “lawful.” 148
F.2d at 430. We do not interpret Judge Wyzanski’s deci-
sion in United States v. United Shoe Machinery Corp.,
110 F.Supp. 295 (D. Mass. 1953), aff’d per curiam, 347
U.S. 521 (1954), as supporting SCM’s argument to the
contrary. In United Shoe, the primary vehicle found to
2la
have been employed by United Shoe in achieving and
maintaining its monopoly was its lease-only system of
distributing its machines. 110 F.Supp. at 344. The patent
acquisitions scrutinized by Judge Wyzanski occurred after
United Shoe possessed substantial market power and were
not “one of the principal factors . . . enabling [United
Shoe] to achieve and hold its share of the market.” 110
F.Supp. at 312. Thus, contrary to appellant’s contention,
the United Shoe case stands in stark contrast to the one at
bar where the patents were acquired prior to the appear-
ance of the relevant product market and where the pat-
ents themselves afforded Xerox the power to achieve
eventual market dominance.
In Alcoa Judge Learned Hand stated that the “success-
ful competitor, having been urged to compete, must not
be turned upon when he wins.” 148 F.2d at 430. And
while that statement was made in regard to a hypothetical
situation where only one of a group of competitors
ultimately survives, it at least indicates a concern Judge
Hand had for preserving those economic incentives that
provide the primary impetus for competition. Subse-
quently, the Supreme Court in United States v. Grinnell
Corp., 384 U.S. 563 (1966), amplified this consideration
when it set forth the elements of a § 2 violation as
follows:
The offense of monopoly under § 2 of the Sher-
man Act has two elements: (1) the possession of
monopoly power in the relevant market and (2) the
willful acquisition or maintenance of that power as
distinguished from growth or development as a con-
sequence of a superior product, business acumen, or
historic accident.
Id. at 570-71 (emphasis added).
22a
Thus, in Berkey Photo, Inc. v. Eastman Kodak Co.,
603 F.2d 263, 275 (2d Cir. 1979), cert. denied, 444 U.S.
1093 (1980), this Court stated that “[w]Je tolerate the
existence of monopoly power. . . only insofar as neces-
sary to preserve competitive incentives and to be fair to
the firm that has attained its position innocently.” In
United States v. Griffith, 334 U.S. 100 (1948), the Su-
preme Court declared, however, that “the use of monop-
oly power, however lawfully acquired, to foreclose com-
petition, to gain a competitive advantage, or to destroy a
competitor, is unlawful.’’ /d. at 107. Echoing the same
consideration in Berkey, Judge Kaufman stated that while
“(t]he mere possession of monopoly power does not ipso
facto condemn a market participant. . . , the firm must
refrain at all times from conduct directed at smothering
competition.” Berkey Photo, Inc. v. Eastman Kodak Co.,
supra, 603 F.2d at 275.
The tension between the objectives of preserving
economic incentives to enhance competition while at the
same time trying to contain the power a successful com-
petitor acquires is heightened tremendously when the
patent laws come into play. As the facts of this case
demonstrate, the acquisition of a patent can create the
potential for tremendous market power.
Ill.
Patent acquisitions are not immune from the antitrust
laws. Surely, a § 2 violation will have occurred where, for
example, the dominant competitor in a market acquires a
patent covering a substantial share of the same market
that he knows when added to his existing share will afford
him monopoly power. See generally Kobe, Inc. v. Demp-
sey Pump Co., 198 F.2d 416 (10th Cir.), cert. denied, 344
23a
U.S. 837 (1952); United States v. Besser Manufacturing
Co., 96 F.Supp. 304, 310-11 (E.D. Mich. 1951), aff’d, 343
U.S. 444 (1952). That the asset acquired in a patent is
irrelevant; in such a case the patented invention already
has been commercialized successfully, and the magnitude
of the transgression of the antitrust laws’ proscription
against willful aggregations of market power outweighs
substantially the negative effect that the elimination of
that class of purchasers for commercialized patents places
upon the patent system.
The patent system would be seriously undermined,
however, were the threat of potential antitrust liability to
attach upon the acquisition of a patent at a time prior to
the existence of the relevant market and, even more
disconcerting, at a time prior to the commercialization of
the patented art. As SCM itself admits, the procurement
of a patent by the inventor will not violate § 2 even where
it is likely that the patent monopoly will evolve into an
economic monopoly; yet SCM would deny the same
reward to anyone but the patentee.’
9 Notwithstanding that “[t}he law . . . recognizes that [a patentee]
may assign to another his patent, in whole or in part, and may license
others to practice his invention.” Zenith Radio Corp. v. Hazeltine
Research, Inc., supra, 395 U.S. at 135, SCM argues that a distinction
should be made between the exploitation of a patent by an inventor
and an investor. We assume, therefore, that had Chester Carlson
possessed the resources to commercialize xerography to the same
extent as did Xerox, SCM would not have challenged a refusal by the
inventor to license his patents as violative of the antitrust laws.
Investors, however, play a key role, if not an indispensable one today,
in both the inventive process and commercialization of inventions.
And it is fair to say, we think, that the contribution of the investor in
both the funding of research that leads to inventions and the promo-
tion that necessarily must follow to achieve successful commercializa-
tion is of comparable value. See generally Picard v. United Aircraft
Corp., 128 F.2d 632, 642 (2d Cir.), cert. denied, 317 U.S. 651 (1942)
(Frank, J., concurring). In either case, the ultimate intended benefi-
ciary of the patent laws—the public—is equally benefited. See gener-
ally Mannington Mills, Inc. v. Congoleum Industries, Inc., 610 F.2d
24a
If the antitrust laws were interpreted to proscribe the
natural evolution of a patent monopoly into an economic
monopoly, then Judge Newman’s concern would be well
founded. If the threat of treble damage liability for
refusing to license were imbedded in the minds of poten-
tial patent holders as a likely prospect incident to every
successful commercial exploitation of a patented inven-
tion, the efficacy of the economic incentives afforded by
our patent system might be severely diminished.
Nevertheless, it is especially clear that the economic
incentives provided by the patent laws were intended to
benefit only those persons who lawfully acquire the rights
granted under our patent system. Cf. Walker Process
Equipment, Inc. v. Food Machinery & Chemical Corp.,
382 U.S. 172 (1965 (patent obtained by fraud on Patent
Office). Where a patent in the first instance has been
lawfully acquired, a patent holder ordinarily should be
allowed to exercise his patent’s exclusionary power even
after achieving commercial success; to allow the imposi-
tion of treble damages based on what a reviewing court
might later consider, with the benefit of hindsight, to be
too much success would seriously threaten the integrity of
the patent system. Where, however, the acquisition itself
is unlawful, the subsequent exercise of the ordinarily
lawful exclusionary power inherent in the patent would be
a continuing wrong, a continuing unlawful exclusion of
potential competitors.
1059, 1070-71 (3d Cir. 1979); United States v. Parker-Rust-Proof Co.,
61 F.Supp. 805, 808 (E.D. Mich. 1945); In re Anthony, 414 F.2d 1383,
1398 (C.C.P.A. 1969); In re Herr, 377 F.2d 610, 619 (C.C.PA. 1967).
Since Xerox participated financially in both the inventive process by
funding research at Battelle and the subsequent commercialization of
xerography by bringing the first plain-paper copier to the market, we
see little reason to deny Xerox the full benefit of the patents it acquired
on this basis alone.
25a
Without passing upon the validity of Judge Newman’s
theory to preclude antitrust damage liability in all cases
where the injury is predicated upon a patent holder’s
refusal to license, we hold that where a patent has been
lawfully acquired, subsequent conduct permissible under
the patent laws cannot trigger any liability under the
antitrust laws.'° This holding, we believe, strikes an
adequate balance between the patent and antitrust laws.
Therefore, to determine whether Xerox incurred any
antitrust damage liability to SCM in 1969, our inquiry
must now shift to determining whether the acquisition of
the Carlson and Battelle patents pursuant to the 1956
agreement violated either the Sherman Act or the Clayton
Act. Because the essence of a patent is the monopoly or
exclusionary power it confers upon the holder, analyzing
the lawfulness of the acquisition of a patent necessitates
that we primarily focus upon the circumstances of the
acquiring party and the status of the relevant product and
geographic markets at the time of acquisition.
IV.
Section 2 of the Sherman Act
Turning to the facts of this case, the patents about
which we are concerned were acquired in 1956, four years
prior to the production of the 914, Xerox’s first auto-
matic plain-paper copier, and at least eight years prior to
the appearance of the relevant market and submarket. In
1956 Xerox had achieved success in the commercialization
of xerography but not in the field of automatic plain-
10 We leave for an appropriate case the resolution of the question
whether damage liability can accrue to a holder for refusing to license
patents that he subsequently abuses through pooling or otherwise.
26a
paper copying. There is evidence in the record, however,
that Xerox in 1956 valued a non-exclusive license in
xerography at $70 million and that key personnel at
Xerox believed that they already possessed the necessary
technology in 1956 to produce a plain-paper copier. Not-
withstanding their optimistic forecasts, however, the con-
fidence of the Xerox organization was still tempered by
the risks of producing a _ new, _ technologically-
sophisticated product line. Thus, in 1958 Xerox consid-
ered the possibility of having IBM manufacture and
market the 914. But before Xerox’s management made a
final decision on the matter, IBM informed them that it
was not interested in manufacturing or marketing the 914
or another model, the 813, having concluded that both
were a bad business risk. While SCM argues that IBM’s
turndown was directed exclusively at the models 914 and
813 and did not amount to a rejection of plain-paper
copying entirely, at the very least the episode demon-
strates that as of 1958 the achievement of commercial
success in plain-paper copying was not a foregone conclu-
sion.
It was also in 1956 that Xerox acquired non-exclusive
licenses from Horizons Corporation, another research
organization, covering a small number of xerographic
patents.'' Additionally, Xerox began to cultivate relation-
ships with its international family of companies in 1956.
But SCM has not argued that either the Horizons patents
or the international agreements caused it any injury.
Rather, SCM contends that these facts constitute proof of
Xerox’s willful acquisition of monopoly power over the
relevant market and submarket that came into being,
according to the jury, between eight and thirteen years
i In 1960 Horizons Corporation agreed to assign these patents to
Xerox.
27a
later. Likewise, other aspects of the 1956 agreement with
Battelle, such as the promise by Battelle to transfer to
Xerox all know-how it developed and patents it obtained
in the future were claimed to be additional evidence of
Xerox’s willful acquisition of its market dominance. But
the promise to transfer all xerographic know-how devel-
oped and patents obtained in the future was conditioned
on Xerox’s promise to contribute at least $25,000 a year
for research that would help develop the know-how and
patents. There appears to be little distinction, if any,
between patents obtained under a contract with a research
organization and patents generated internally by a com-
pany, see P. Areeda & D. Turner, Antitrust Law: An
Analysis of Antitrust Principles and Their Application
4 704e (1978), and ordinarily there is no limitation on a
company’s freedom to generate its own patents. See
generally Automatic Radio Manufacturing Co. v. Hazel-
tine Research, Inc., 339 U.S. 827, 834 (1950). The jury’s
specific finding that by 1969 Xerox had not obtained any
patents primarily for the purpose of blocking the develop-
ment and marketing of competitive products laid to rest
any suspicion that either Xerox’s internal R & D program
or its R & D work subcontracted to Battelle was driven
principally by anticompetitive animus.'? In any event,
none of Xerox’s conduct other than the acquisition of the
Carlson and Battelle patents under the 1956 agreement
caused SCM any harm. But even more important, all of
the events described occurred between eight and thirteen
years prior to the appearance of the relevant product
market and submarket defined by SCM.
12 SCM also argues that the two-year covenants not to compete
imposed by Xerox on its employees up until 1972 also evidence Xerox's
willful acquisition of monopoly power. We find this argument wholly
without merit.
28a
In scrutinizing acquisitions of patents under § 2 of the
Sherman Act, the focus should be upon the market power
that will be conferred by the patent in relation to the
market position then occupied by the acquiring party. We
agree with Professors Areeda and Turner that whether
limitations should be imposed on the patent rights of an
acquiring party should be dictated by the extent of the
power already possessed by that party in the relevant
market into which the products embodying the patented
art enter. See Areeda & Turner, supra, at { 819. There-
fore, that Xerox acquired the patents in this case four
years prior to the production of the first plain-paper
copier and at least eight years prior to the appearance of
the relevant product market and submarket over which
those patents eventually afforded it monopoly power
would seem to dispose entirely of SCM’s 1969 exclusion
claim under § 2.
SCM argues, however, that
[t]o uphold the jury’s verdicts in this case, this Court
need hold only that an agreement to purchase patents
that eliminate an existing potential for competition in
a reasonably foreseeable economic market can be
found to be unreasonable if it (a) results in the
acquisition of persistent, substantial, real-world
economic monopoly power and (b) imposes a re-
straint on competition that is greater than reasonably
necessary to induce the purchaser to develop and
market the product involved.
SCM Reply Br. at 27. SCM’s proposition is that even
prior to the commercialization of the patented invention
and prior to the appearance of the relevant market over
which Xerox eventually achieved monopoly power a § 2
violation occurred. SCM suggests that the antitrust laws
29a
impose a limitation on the extent of the rights in a patent
a purchaser may acquire, and that in some instances a
patent with its inherent exclusionary power may not be
transferred in toto. The limitation that SCM would im-
pose, however, turns not upon the market position of the
acquiring party, but rather, upon the potential for com-
mercial success a particular patent may hold. Thus, SCM
argues that a purchaser of a patent is entitled only to the
rights in a patent reasonably necessary to induce his
investment to commercialize the patent. Presumably, un-
der SCM’s proposed rule, where the commercial success
of a patented invention virtually is guaranteed, no person
other than the inventor can hold exclusive rights in the
patent, at least where it is foreseeable that the products
generated under the patent will create their own relevant
product market.
SCM contends that the test it proposes represents the
appropriate rule of reason analysis to be employed in
patent acquisition cases. By introducing the concept of
foreseeability, SCM seeks to escape an unfavorable dispo-
sition of its case that it apparently feared might be based
upon the absence of the relevant product market and
submarket at the time of the patent acquisitions in 1956.
Implicit in the jury’s findings was that it was reasonably
foreseeable in 1956 that the agreement with Battelle
would permit Xerox to obtain monopoly power in a
relevant product market.'’ While sufficient evidence was
13 This finding was implicit in the jury’s affirmative answer to question
20: “Was the probable effect of Xerox’s acquisition of patents pur-
suant to the 1956 Xerox-Battelle agreement, when the agreement was
made, substantially to lessen competition or to tend to create a
monopoly in any relevant market or sub-market that you have found
to exist?” In explaining this question, Judge Newman instructed the
jurors to determine “whether the acquisition at the time it was made
was reasonably probable to have the proscribed effect in the reasona-
bly foreseable future.”
30a
presented by Xerox to support a contrary finding, we are
unable to hold, as a matter of law, that no rational jury
could find that a reasonably foreseeable effect of the 1956
agreement was the eventual acquisition by Xerox of
monopoly power in a relevant market. But notwithstand-
ing the jury’s implicit finding, we conclude that, under
the facts presented here, the policies of the patent laws
preclude the imposition of antitrust liability.
It is undisputed that the first automatic plain-paper
copier was not produced by Xerox until four years after
the 1956 agreement was executed. Additionally, while
Xerox concedes that its plain-paper copiers eventually
formed an independent relevant product market, SCM
has not challenged on appeal the jury’s finding that this
event did not occur until some time after 1964, eight years
after the agreement. Furthermore, Xerox contributed in a
very substantial way to the development of an automatic
plain-paper copier by investing in research and develop-
ment not only after 1956 but also for almost a decade
before the agreement. Moreover, the party from whom
Xerox purchased the patent under the 1956 agreement
was not a potential competitor. We believe that, under the
circumstances presented here, to impose antitrust liability
upon Xerox would severely trample upon the incentives
provided by our patent laws and thus undermine the
entire patent system. Therefore, irrespective of the jury’s
implicit finding that Xerox’s commercial success was
reasonably foreseeable in 1956, Xerox was lawfully en-
titled to purchase the patents it did pursuant to the
agreement it made with Battelle that year.
With respect to Xerox’s subsequent unilateral refusal to
license the Carlson and Battelle patents, which we have
held were lawfully acquired, that conduct was permissible
under the patent laws and, therefore, did not give rise to
any liability under § 2.
3la
Section 1 of the Sherman Act
SCM contends that the jury implicitly concluded that
the patent acquisitions pursuant to the 1956 agreement
unreasonably restrained trade in 1956, since they had
been instructed that “if it was lawful for Xerox to acquire
the four basic Carlson patents in 1956 and the then
existing Battelle patents in 1959, then those aspects of the
1956 agreement [could not] contribute to a section 1
violation at some later time.” (J. App. 4533). While this
may be a fair inference to draw in light of the charge, we
are convinced that, as a matter of law, the 1956 agree-
ment did not unreasonably restrain trade in violation of
§ 1 at the time it was executed. As Judge Newman noted
below, the transfer of the Carlson and Battelle patents
pursuant to the 1956 agreement could not have restrained
any “competition in 1956 or 1959 because there was no
competition in any convenience-office copier or plain-pa-
per copier embodying the patented inventions” in either
of those years. 463 F.Supp. at 1004.
The gist of SCM’s § 1 argument is that absent the 1956
agreement, Battelle would have enforced the sublicensing
obligation that its prior agreements had imposed upon
Xerox, and through the sublicenses generated by that
contractual obligation there would have been competitors
in plain-paper copying, with SCM among them. Along
the lines of its § 2 argument, SCM argues that the 1956
agreement was an unreasonable restraint of trade because
it gave to Xerox absolute exclusionary power, rather than
that amount of power reasonably necessary to induce
Xerox to continue its efforts to commercialize xerog-
raphy. SCM contends that because Xerox foresaw com-
mercial success and dominance over the convenience
office copier market, the 1956 agreement which gave
Xerox the power to eliminate substantial potential com-
32a
petition was unreasonable and, therefore, illegal. Since
we have already concluded in our § 2 discussion that
under the facts presented here, the policies of the patent
laws forbid the imposition of antitrust liability irrespec-
tive of the jury’s implied finding that Xerox’s success in
plain-paper copying was foreseeable in 1956, SCM’s argu-
ment under § | along these lines must likewise fail.
While, in an economic sense, it might have been unrea-
sonable in 1964 and 1969 for Xerox unilaterally to refuse
to license for plain-paper copying use any of the xero-
graphic patents acquired pursuant to the 1956 agreement,
the lawfulness of their acquisition in 1956 rendered that
conduct, which was permitted under the patent laws,
reasonable for § 1 purposes. '*
The only continuing contractual obligation under the
1956 agreement which could be reasonably challenged
under § 1 as of 1964 or 1969 is the provision that
obligated Battelle to continue to assign to Xerox all
xerographic patents it obtained and know-how it devel-
oped. However, all of the contractual obligations betwen
Xerox and Battelle under the 1956 agreement that are
claimed by SCM to have caused it any injury were fully
performed by January 2, 1959. SCM offered no evidence
at trial that any of the patents Xerox obtained from
Battelle after January 2, 1959 caused it any harm. Since
the latter provision of the 1956 agreement does not
provide a basis for SCM to recover damages, we need not
decide its reasonableness under § 1 as of 1964 or 1969.
14 In connection with the patents assigned on January 2, 1959, the
transfer of these improvement patents on that date pursuant to the
1956 agreement was a mere formality. Under the 1956 agreement,
Xerox acquired an exclusive license to each of Battelle’s then existing
and future xerographic patents on the date the agreement was exe-
cuted. Thus Xerox had already acquired the exclusionary power
inherent in each of those patents prior to their formal assignment on
January 2, 1959.
33a
SCM argues alternatively that Xerox’s continued hold-
ing of the Carlson and Battelle patents unreasonably
restrained trade in 1969 in violation of § 1. As Judge
Newman noted below, “there is no authority for uphold-
ing damage liability under § 1 because of the subsequent
holding of a patent previously acquired.” 463 F.Supp. at
1004. And we see no reason to expand judicially the scope
of § 1 of the Sherman Act to accommodate a claim that is
already cognizable under another antitrust provision—§ 7
of the Clayton Act, see United States v. E. I. du Pont de
Nemours & Co., 353 U.S. 586 (1957) (“du Pont-GM”),
especially where the claim has been so asserted.
Section 7 of the Clayton Act
Section 7 of the Clayton Act proscribes a corporation
from acquiring the whole or any part of the assets of
another corporation where “the effect of such acquisition
may be substantially to lessen competition, or to tend to
create a monopoly [in any line of commerce],” 15 U.S.C.
§ 18 (1976). Since a patent is a form of property, see
generally Transparent-Wrap Machine Corp. v. Stokes &
Smith Co., 329 U.S. 637, 643 (1947), and thus an asset,
there seems little reason to exempt patent acquisitions
from scrutiny under this provision. See United States v.
Lever Brothers Co., 216 F.Supp. 887, 889 (S.D.N.Y.
1963); see generally L. Sullivan, Handbook of the Law of
Antitrust, § 180 (1977); 16a J. von Kalinowski, Business
Organizations: Antitrust Laws and Trade Regulation
§ 16.05 (1980); Kessler & Stern, Competition, Contract,
and Vertical Integration, 69 Yale L. J. 1, 75-78 (1959).
Section 7 principally was designed to curtail the anti-
competitive consequences of corporate acquisitions in
their “incipiency.” Brown Shoe Co. v. United States, 370
U.S. 294, 317 (1962). Thus, the analysis ordinarily em-
34a
ployed in determining the lawfulness of a corporate acquisi-
tion under § 7 is prospective in nature. The jury found that
the probable effect of the 1956 Xerox-Battelle agreement
was substantially to lessen competition or to tend to create a
monopoly in the relevant product market and submarket
that appeared between eight and thirteen years later. The
jury additionally found that, as of 1964 and 1969, the prob-
able effect of Xerox’s continued holding of patents ac-
quired pursuant to the 1956 Xerox-Battelle agreement was
substantially to lessen competition or to tend to create a
monopoly. We conclude that neither of these findings can
stand as a matter of law.
While the Supreme Court in Brown Shoe Co, v. United
States, supra, 370 U.S. at 323, stated that the language
contained in § 7 is indicative that Congress’ “concern was
with probabilities, not certainties,” the speculative aspect
of this antitrust law was intended to allow courts to
appreciate immediately the potential consequences that a
particular acquisition might have upon an existing line of
commerce. Thus in Brown Shoe, the Supreme Court
stated:
Because § 7 of the Clayton Act prohibits any merger
which may substantially lessen competition “in any
line of commerce,” (emphasis supplied) it is neces-
sary to examine the effects of a merger in each such
economically significant submarket to determine if
there is a reasonable probability that the merger will
substantially lessen competition.
370 U.S. at 325. The existing market provides the frame-
work in which the probability and extent of an adverse
impact upon competition may be measured. In the case at
bar it would have been impossible to examine the effects
35a
of the Xerox-Battelle agreement upon the relevant prod-
uct market and submarket in 1956 because those markets
did not come into being until sometime between 1964 and
1969. The jury was instructed that it should include in its
considerations whether the appearance of the relevant
market and submarket and Xerox’s domination of those
markets was reasonably foreseeable in 1956. (J. App.
4551-54).
Judge Newman concisely stated below that “[s]Jection 7
is concerned with undue concentrations of power and the
anti-competitive effects of permitting one entity with
market power to strengthen its position by acquisition.”
463 F.Supp. at 1001-02. Where, as here, it is conceded
that the relevant product market and submarket did not
exist until eight years following the patent acquisitions
and that Xerox possessed no power whatsoever in even
the inchoate market and submarket until 1960 when it
introduced its 914 copier, as a matter of law the 1956
agreement did not violate § 7 at the time it was made.
Finally, our decision regarding SCM’s foreseeability argu-
ment under §§ | and 2 of the Sherman Act disposes of its
argument propounded under § 7 along those lines.
SCM argues alternatively that the Supreme Court’s
decisions in du Pont-GM, supra, and United States v.
ITT Continental Baking Co., 420 U.S. 223 (1975), require
that we affirm the jury’s second finding under § 7 that
Xerox’s continued “holding” of the patents it obtained
under the Xerox-Battelle agreement in 1956 violated § 7
as of 1969. In du Pont-GM, the government commenced
its action approximately thirty years after du Pont had
purchased a twenty-three percent stock interest in General
Motors Corporation, and alleged that du Pont had used
its stock ownership to attain a “commanding position as
36a
General Motors’ supplier of automotive finishes and
fabrics,” 353 U.S. at 588-89. There, the Court held that
any acquisition by one corporation of all or any part
of the stock of another corporation, competitor or
not, is within the reach of the section whenever the
reasonable likelihood appears that the acquisition
will result in a restraint of commerce or in the
creation of a monopoly in any line of commerce.
353 U.S. at 592 (emphasis added). Subsequently, in /77
Continental Baking, the Court reaffirmed, albeit in dic-
tum, its holding in du Pont-GM that the term acquisition
as it is employed in § 7 comprehends both the initial
“acquiring” and subsequent “retaining” of the stock of
another corporation. 420 U.S. at 241-42. Relying on these
cases, SCM would have us hold that Xerox’s acquisition
of the Carlson and Battelle patents in 1956 became
actionable under § 7 as soon as the monopoly afforded by
the patents burgeoned into an economic monopoly. What-
ever the meaning that may be ascribed to § 7 in other
contexts, the patent laws circumscribe the scope of the
provision here. Where a corporation’s acquisition of a
patent is not violative of § 7, as was the case here, its
subsequent holding of the patent cannot later be deemed
violative of this section. Where a company has acquired
patents lawfully, it must be entitled to hold them free
from the threat of antitrust liability for the seventeen
years that the patent laws provide. To hold otherwise
would unduly trespass upon the policies that underlie the
patent law system. The restraint placed upon competition
is temporally limited by the term of the patents, and
must, in deference to the patent system, be tolerated
throughout the duration of the patent grants.
37a
The MUP Claim
The jury determined that the Machine Utilization Plan
implemented by Xerox in 1968 coerced some of Xerox’s
high-volume machine customers to take Xerox’s low-vol-
ume machines and that the effect of MUP was to tend to
create a monopoly or to lessen substantially competition
in a relevant market or submarket. These findings sup-
ported SCM’s contention that MUP constituted an illegal
tying arrangement in violation of § 3 of the Clayton Act,
15 U.S.C. § 14 (1976). The jury additionally concluded
that MUP was utilized by Xerox to foreclose competition
or to gain a substantial competitive advantage. This
finding translated into a § 2 violation, since the jury also
determined that Xerox possessed monopoly power in 1969.
See generally United States v. Griffith, supra, 334 U.S. at
107. Judge Newman ruled, however, that notwith-
standing the jury’s findings concerning the substantive
aspects of SCM’s MUP claim, SCM had failed to demon-
strate a rational, causal connection between the profits
lost by SCM and MUP.
In Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251,
264 (1946), the Supreme Court set forth the standard to
be satisfied to sustain an award of treble damages in a
private antitrust suit:
[I]n the absence of more precise proof, the jury [can]
conclude as a matter of just and reasonable inference
from the proof of defendants’ wrongful acts and
their tendency to injure plaintiffs’ business, and
from the evidence of the decline in prices, profits and
values, not shown to be attributable to other causes,
that defendants’ wrongful acts had caused damage to
the plaintiffs.
38a
We agree that a liberal rule of damages must be applied in
antitrust cases both to encourage private enforcement of
the antitrust laws and to insure that the defendant bears
“the risk of the uncertainty which his own wrong has
created.” Jd. at 265; see Jack Kahn Music Co. v. Baldwin
Piano & Organ Co., 604 F.2d 755, 763 (2d Cir. 1979). But
the Bigelow Court carefully pointed out that “even where
the defendant by his own wrong has prevented a more
precise computation, the jury may not render a verdict
based on speculation or guesswork.” Bigelow v. RKO
Radio Pictures, Inc., supra, 327 U.S. at 264. We are of
the opinion that even under the liberal Bigelow rule, SCM
failed to carry its burden.
SCM calculated its damages caused by MUP based on
the cancellation rates of Xerox’s low-volume copiers
before and after the MUP marketing program was imple-
mented. SCM’s theory is that if MUP had the effect of
decreasing the cancellation rates of its low-volume cop-
iers, then it can be inferred that MUP coerced some
customers into retaining unwanted Xerox low-volume
copiers instead of using low-volume coated-paper copiers
manufactured by Xerox’s competitors. SCM offered evi-
dence of the percentage of Xerox low-volume machine
customers who cancelled and were acquired by SCM prior
to MUP and the drop in the overall Xerox low-volume
machine cancellation rate and the concomitant loss of
dissatisfied Xerox customers after MUP. SCM contended
that it would have received the same share of the addi-
tional cancellations that it received of actual cancellations
after MUP. Xerox, however, revealed a gaping hole in
SCM’s damage theory: the cancellation rates of three out
of four of Xerox’s low-volume machines actually in-
creased following MUP. Additionally, with respect to the
only Xerox low-volume machine whose cancellation rate
39a
actually fell following MUP, the 813, Xerox pointed out
that SCM calculated its lost placements on the basis of
the entire 813 population rather than on the substantially
smaller population of 813s on MUP. While the latter
deficiency would merely require that the damages be
recalculated on remand, the insufficient showing of
causality between MUP and the decline in 813 cancel-
lations leads us to affirm Judge Newman’s conclusion
below. While an antitrust plaintiff may, in a proper case,
recover damages based upon evidence of lost profits “not
shown to be attributable to other causes,” Bigelow v.
RKO Radio Pictures, Inc., supra, 327 U.S. at 264, the
plaintiff must support by more than mere speculation its
allegation of causality between the defendant’s acts and
the injury it incurred. SCM’s own expert witness con-
ceded at trial that he could not explain the fact that the
cancellation rates of three out of four of Xerox’s low-vol-
ume machines increased following MUP. In light of these
facts we agree with Judge Newman’s decision that it
would be irrational to attribute the decline in the cancel-
lation rate of the 813 to MUP.
Conclusion
The controlling question of law certified by Judge
Newman below and accepted by this Court for interlocu-
tory review concerning SCM’s 1969 exclusion claim is
answered in the negative. Based on the evidence presented
we are convinced that none of Xerox’s patent-related
conduct contributed to any antitrust violation and that,
therefore, SCM is not entitled to recover any monetary
damages in connection with that claim.
With respect to SCM’s MUP claim, we affirm Judge
Newman’s decision denying damage recovery on the
40a
ground that insufficient evidence was offered by SCM to
support the jury’s finding that the lost profits claimed by
SCM were caused by MUP.
This action is remanded to the district court for further
proceedings consistent with this opinion.
>
WATERMAN, Circuit Judge:
I concur in the result.
Appendin B
Opinion of the District Court
4la
SCM CORPORATION
Vv.
XEROX CORPORATION.
Civ. No. 15807.
United States District Court,
D. Connecticut.
Dec. 29, 1978.
MEMORANDUM OF DECISION
[463 F. Supp. 983]
NEWMAN, District Judge.
[985] This case presents important issues concerning the
relationship between the patent laws and the antitrust laws.
The issues arise in the procedural context of a private treble
damage action brought pursuant to § 4 of the Clayton Act, 15
U.S.C. § 15, and tried to a jury. The factual context is the
manufacturing and marketing of office photocopy machines—
machines capable of automatically creating copies of an origi-
nal document.
Plaintiff is SCM Corporation,' a conglomerate with annual
revenues in excess of $1 billion. During the 1960’s SCM was
among the world’s leading producers of coated paper copiers—
machines capable of automatically creating copies of an origi-
nal document on specially treated paper coated with zinc
oxide. In the mid 1970’s SCM marketed a plain paper copier,
the 6740, which it purchased from the Van Dyk Corporation,
I “SCM” is derived from the initials of the Smith-Corona Company,
manufacturer of typewriters, and the Marchant Company, manufac-
turer of calculators, who merged to form the plaintiff corporation.
42a
and currently markets two models of a plain paper copier
manufactured by a Japanese company.
Defendant is Xerox Corporation,’ a business machines com-
pany with annual revenues in excess of $4 billion. In 1960
Xerox brought to market the world’s first automatic plain
paper copier, the Xerox 914. For the next ten years Xerox and
its family of companies were the world’s only producers of
plain paper copiers. While a competitive plain paper copier
was introduced by IBM in 1970 and by numerous manufac-
turers thereafter, Xerox continues today to be the world leader
in plain paper copiers.
The complaint, filed July 31, 1973, alleged that Xerox,
acting unilaterally and in concert with other companies, ex-
cluded SCM from the field of plain paper copying, causing
damages claimed at trial to exceed $500 million. The complaint
alleged violations of §§ 1 and 2 of the Sherman Act, 15 U.S.C.
§§ 1 and 2, and § 7 of the Clayton Act, 15 U.S.C. § 18. An
amended complaint added allegations of injury to SCM’s
copier business by Xerox marketing practices in violation of
§ 2 of the Sherman Act and § 3 of the Clayton Act, 15 U.S.C.
§ 14. In addition to trebled damages, far-reaching equitable
relief was sought.’ A preliminary [986] injunction was sought
and denied. Pre-trial Ruling No. 6, aff’d, SCM Corp. v. Xerox
Corp., 507 F.2d 358 (2d Cir. 1974).
After extensive pre-trial preparations, see SCM Corp. v.
Xerox Corp., 77 F.R.D. 10 (D.Conn.1977), jury trial* began on
2 “Xerox” is derived from the word “xerography”—dry writing—an
invented name for the process of reproducing images by an electropho-
tographic process.
3 Other issues raised by the pleadings concerned an SCM claim of
invalidity of one Xerox patent, and Xerox claims of patent infringe-
ment by SCM. These patent validity and infringement issues have been
severed. For purposes of all claims put to the jury, SCM assumed the
validity of every Xerox patent.
4 The jury, requested by Xerox, was empaneled under an agreed upon
procedure whereby 14 persons were selected, none was designated as
43a
June 20, 1977. Fourteen months later, on August 16, 1978, the
jury was discharged after returning the last of 54 verdicts.
Evidence was presented during 215 days, summations con-
sumed 412 days, and the jury deliberated for 38 days. The trial
transcript totals 46,802 pages.
I. Basic Claims and Verdicts
SCM Damage Claims.
SCM presented damage claims in five broad categories:
excluding SCM from plain paper copying beginning in 1964;
excluding SCM from plain paper copying beginning in 1969;
denying SCM the opportunity to market in the United States
the Fuji-Xerox 2200 copier manufactured in Japan; impairing
SCM’s marketing of coated paper copiers by use of two pricing
plans known as MUP and XCP; and impairing SCM’s market-
ing of 6740 plain paper copiers by various practices.
The 1964 and 1969 exclusion claims were the heart of SCM’s
case. SCM alleged, alternatively, that beginning in 1964 or 1969
and continuing until the present, Xerox monopolized the plain
paper copier industry and excluded SCM from entering the
field. SCM sought the damages it would have avoided if Xerox
had not refused SCM’s requests in 1964 and 1969 for plain
paper copier patent licenses. The 1964 and 1969 exclusion
claims each contained three elements of damages: (a) the
financial benefits SCM would have achieved, which included
net profits through 1976 and net going concern value as of the
end of 1976; (b) the actual losses SCM incurred in the place-
ment of coated paper copiers; and (c) the actual losses SCM
an alternate, and all remaining at the conclusion of the trial were
permitted to deliberate provided at least six remained. Attrition re-
duced the final jury to nine members.
For an interesting analysis of the composition of the jury and how
the demographic characteristics of the final jury was shaped by the
selection process, see Comment, “Protracted Commercial Litigation
and the Seventh Amendment,” 10 Conn.L.Rev. 775 (1978).
44a
incurred in the placement of the 6740 plain paper copiers. It
was SCM’s theory that had it not been excluded from entering
into plain paper copying in 1964 and 1969, it would not only
have made money, but would have avoided the losses it
suffered in its coated paper copier business and in the place-
ment of 6740's.
The presentation of both a 1964 and a 1969 exclusion claim
stemmed from a dispute concerning application of the statute
of limitations. SCM initially sought patent licenses from Xerox
in 1964° and annually thereafter at least through 1969. The
complaint was filed July 31, 1973. Normally the applicable
four-year statute of limitations would apply to bar any cause of
action accruing prior to July 31, 1969. 15 U.S.C. § 1Sb.
However, SCM alleged, and Xerox did not dispute, that the
limitations period was extended back to January 16, 1969,
because (1) on that date the Federal Trade Commission filed a
complaint against Xerox alleging monopolization of the plain
paper copying field, and (2) the institution of proceedings by
the United States suspends the running of the statute of
limitations “in respect of every private right of action . .
based in whole or in part on any matter complained of in said
proceeding. . . .” 15 U.S.C. § 16(b). Actions initiated by the
FTC toll the four-year limitations period. Minnesota Mining &
Manufacturing Co. v. New Jersey, 381 U.S. 311, 85 S.Ct.
1473, 14 L.Ed.2d 405 (1965). Xerox also raised no [987] issue
concerning the first two weeks of January, 1969; so the parties
were in agreement that SCM’s 1973 complaint was timely as to
causes of action accruing on or after January 1, 1969.° The
5 There was a substantial dispute as to whether the SCM license
request in 1964 was serious and whether SCM then had the intention,
preparedness, and capability to enter the plain paper copying field, an
issue ultimately resolved against SCM by the jury (Question 22). But
there was no dispute that a license request was made in 1964,
6 Though Xerox agreed the complaint was timely with respect to the
1969 exclusion claim as against the defense of limitations, it presented
a further defense that SCM’s failure to sue at an earlier time rendered
all exclusion damages barred under the doctrine of avoidable conse-
quences. See note 16, infra.
45a
1969 exclusion claim therefore sought damages SCM alleged it
had suffered by being denied patent licenses on or about
January 1, 1969.
As an alternative to the 1969 exclusion claim, SCM pre-
sented a 1964 exclusion claim for damages allegedly suffered
by being denied patent licenses on or about January |, 1964.
SCM contended that the four-year limitations period, as ex-
tended back to January 16, 1969, by the FTC complaint, did
not bar this claim because, under the principles of Zenith
Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 91
S.Ct. 1247, 28 L.Ed.2d 552 (1971), the damages flowing from
the 1964 license denial were not ascertainable until after Janu-
ary 16, 1969, and the cause of action based on the 1964 license
denial had therefore not accrued until after January 16, 1969.’
With respect to both the 1964 and 1969 exclusion claims,
SCM estimated its lost profits by presenting elaborate
economic models as to what would have happened if it had
secured from Xerox plain paper copier licenses on or about
January | of 1964 and 1969." SCM estimated the types of
7 SCM also contended that the tolling provisions of 15 U.S.C. § 16(b)
extended the limitations period back to 1965, when the FTC began its
investigation of Xerox. The Court concluded that the filing of the FTC
complaint was the earliest relevant date for purposes of § 16(b). C/.
Greyhound Corp. v. Mt. Hood Stages, Inc., 437 U.S. 322, 98 S.Ct.
2370, 57 L.Ed.2d 239 (1978).
8 SCM also contended that it was not limited to exclusion claims
measured from either January |, 1964, or January 1, 1969, but could
also seek damages starting a: any intermediate point that the jury
found warranted by the evidence. This contention became significant
when the jury rejected the 1964 claim, leaving only the 1969 claim in
issue. The Court ruled that SCM had given the jury evidence of
damages flowing from the 1964 license denial and the 1969 license
denial, and had failed to present any evidence from which the jury
could reasonably estimate what the damages would have been had
SCM obtained patent licenses at some intermediate point. There was
no data or opinion evidence that would permit a pro rata award of
damages for whatever portion of the 1964 exclusion claim the jury
found to be established. SCM’s estimates of what would have occurred
(footnote continued on next page)
46a
machines it would have manufactured, the revenues it would
have realized, and the costs it would have incurred. Since the
1964 exclusion claim estimated placements and profits over a
longer period of time than the period estimated for the 1969
claim, the 1964 damage claim was considerably higher. SCM
sought $507 million for the 1964 exclusion claim and $100
million for the 1969 exclusion claim. SCM also sought $12
million for the Fuji-Xerox 2200 claim, $15 million for the
MUP and XCP marketing claims, and $4 million for the 6740
marketing claim. SCM also sought trebling of all sums recov-
ered.
Structure of the Trial.
The presentation of evidence was divided into three stages.
The first stage, which consumed the bulk of the trial, con-
cerned all issues of antitrust violation and the lost profits
component of the 1964 and 1969 exclusion damage claims.’
if it had obtained licenses in 1964 or 1969 differed in fundamental
respects. SCM estimated the production of entirely different machines,
different market shares, different prices, and different costs. Whether
or not the 1964 and 1969 damage estimates were sufficiently non-spec-
ulative to permit a damage award, any estimate of damages for a
period beginning at an intermediate point would have been wholly
speculative,
9 The Court permitted evidence of SCM’s claimed lost profits to be
presented in what was generally the liability phase of the trial because
of Xerox's contention concerning SCM’s intention to enter plain paper
copying. Xerox maintained that SCM did not intend to enter plain
paper copying in either 1964 or 1969 and offered to support this
contention with evidence that if SCM had entered the field at either
date, SCM would have suffered losses. Since the prospect of losses was
relevant in dete: mining whether SCM had the requisite intent, the jury,
considering the existence of intent, was entitled to hear the parties’
conflicting claims as to whether SCM would have made profits or
suffered losses. All the evidence available at the end of 1976 and
offered to show whether entry in 1964 or 1969 would actually have
produced profits would not have been available in 1964 or 1969 to
estimate prospectively the likelihood of profits. However, there was
substantial overlap between the bases for estimates available to be
47a
The second [988] stage, consuming three days of evidence,
concerned the actual loss components (for both coated and
plain paper) of the 1969 exclusion damage claim,'’ plus the
damage claims based on marketing practices.'' The third stage,
requiring only one day of evidence, concerned the net going
concern value component of the 1969 exclusion damage
claim.'?
The Court elected to submit to the jury a large number of
interrogatories. This was done, over the plaintiff’s objection,
for two reasons. First, the sheer volume and complexity of the
10
12
made prospectively in 1964 and 1969 and for estimates to be made
retrospectively in 1976, Therefore, Xerox was given an opportunity to
prove that losses would have occurred, so that it could contend that the
prospect of such losses would have deterred SCM in 1969 from
entering plain paper copying if licenses were available.
SCM claimed $40.5 million for actual losses.
Since the jury at the end of the first stage rejected SCM's claim
concerning the Fuji-Xerox 2200 and the 6740 marketing claim, no
evidence was presented concerning the amount of damages on these
claims. The jury's findings in favor of SCM concerning the MUP and
XCP pricing claims led to the presentation of damage evidence on
these claims. In addition, the Court concluded, contrary to the posi-
tion taken when the first stage was concluded, to permit the jury to
consider evidence of the component of SCM’s 1969 exclusion claim
concerning actual losses in the placement of 6740's, This is not the
6740 marketing claim rejected by the jury in the first stage. That claim
concerned Xerox practices alleged to impair SCM’s ability to place
6740's. The 6740 actual loss claim was that if SCM had been granted
plain paper copier patent licenses in 1969, it would not have embarked
on the 6740 program at all in the 1970's and thereby avoided all the
actual losses it sustained in that venture.
SCM claimed $48.2 million for loss of net going concern value. The
Court separated evidence of the net going concern value damages into
a third stage of the trial to avoid the risk of prejudice to Xerox when
the jury considered the amount of lost profits under the 1969 exclusion
claim, Since the net going concern value claim was of exceedingly
doubtful validity, it seemed advisable to avoid the risk that the jury
might assess that claim and the lost profits claim together and reach a
compromise that might be based on an invalid theory.
48a
evidence necessitated focusing the jury’s attention on specific
issues to be sure that orderly decision-making occurred. Sec-
ond, the use of numerous interrogatories seemed to offer some
prospect of minimizing the risk of retrial. That objective
assumed special importance in this case because of the extraor-
dinary length of the trial and the presence of numerous novel
or at least unsettled issues of law.'’ Maximizing jury decision-
making remained a principal objective of the Court throughout
the trial in order to provide opportunity for particularized
appellate review. The interrogatories answered by the jury are
set forth in full in Appendix A. Since the 1964 and 1969
exclusion claims raised numerous pairs of identical issues,
differing only as to years, many of the questions concerning
the 1964 claim were repeated for the 1969 claim, and given the
same number but with the addition of an “a.”
As with the evidence, the jury’s decision-making was divided
into stages, but, for reasons detailed in the margin'’ the
13. See Vandercook & Son, Inc. v. Thorpe, 344 F.2d 930, 931 n. 2 (Sth
Cir. 1965), indicating “the desirability of using special interrogatories
under Fed.R.Civ.P. 49a) with a general charge where distinctive, or
doubtful (or both), theories are at issue, or where the law is in a state
of flux.” See generally, Brown, “Federal Special Verdicts: The Doubt
Eliminator,” 44 F.R.D. 338 (1967),
14s Three differences should be noted. First, though the evidence con-
cerning the amount of lost profits in the 1969 exclusion claim was
presented in the first stage, the decision-making as to quantification of
this component of the 1969 exclusion claim occurred at the end of the
second stage. (Questions 50 and 51), See footnote 9, supra. Second,
though evidence of proximate cause was presented in the first stage,
decision-making on several proximate cause issues was deferred until
the second stage so that the jury would have evidence of the amount of
damage when deciding whether any damages were proximately caused
by wrongful conduct. Proximate cause issues submitted to the jury in
the second stage concerned the MUP and XCP pricing plans (Ques-
tions 52, 54, and 57) ard the 6740 actual loss component of the 1969
exclusion claim (Question 59). Third, though evidence concerning the
XCP pricing plan was presented in the first stage, the violation
questions submitted to the jury at the end of the first stage concerning
the pricing plan issues (Questions 43-47) and the jury’s responses left
49a
divi-[989]sion of jury decision-making differed slightly from
the division of evidence. Initially 76 questions were submitted
to the jury at the conclusion of the first stage of evidence. The
jury was instructed first to answer the four questions concern-
ing the relevant product markets (Questions 1, la, 2, and 2a)
and report their verdicts on these issues before proceeding
further. The jury’s verdicts on the product market issues,
agreeing with SCM’s contentions as of 1969, but not as of
1964, prompted the Court to withdraw from the jury’s consid-
eration nine questions dealing with the 1964 exclusion claim.
Since some of the remaining questions were to be answered
only if a “yes” answer were given to preceding questions, the
jury answered 44 questions at the end of the first stage. One
aspect of the jury’s responses, discussed at pages 1009-1010,
infra, prompted the Court to submit two additional questions
(Questions 24a-1 and 27a-1). In the second stage, the jury was
given 11 questions, concerning some issues of proximate cause
and quantification of damages. Because of some negative
answers, the jury answered seven questions of this group. In
the third stage only a single question was asked and answered.
This concerned quantification of the net going concern value
component of the 1969 exclusion claim.
Jury’s Verdicts on SCM’s Damage Claims.
The jury’s verdicts were in favor of SCM on some parts of
two of the five damage claims, but also in favor of Xerox on
one of its defense contentions. As to the 1964 exclusion claim,
the jury rejected SCM’s contentions concerning the relevant
market or sub-market as of 1964. (Questions | and 2). SCM
had contended that there existed by 1964 a relevant market
consisting of “convenience office copiers” using both plain and
coated paper and a relevant sub-market consisting of “conven-
ience office copiers” using only plain paper. “Convenience
in doubt the jury’s view of the XCP plan. Therefore, a separate
question as to whether the XCP plan was a law violation was
submitted at the end of the second stage (Question 56).
50a
office copiers” meant copying machines suitable for automatic
use in offices but not including spirit duplicators, mimeograph
machines, or offset machines. Xerox defined the relevant
market to include spirit, mimeo, and offset, with offset in-
cluded to the extent that the machines were used for run
lengths of less than 200 copies from an original.
Despite the jury’s rejection of SCM’s market definitions as
of 1964, the jury was asked several questions concerning other
aspects of the 1964 claim.'* The jury concluded that SCM had
not proved that in 1964 it [990] had the intention, prepared-
ness, and capability to enter into plain paper copying. (Ques-
15 The substantive questions concerning some aspects of the 1964
exclusion claim were submitted to the jury, notwithstanding the jury’s
rejection of SCM’s 1964 relevant market contentions, for two reasons.
First, additional fact-finding by the jury offered the prospect of
determining whether necessary elements of the 1964 exclusion claim
were established wholly apart from the relevant market contentions.
As it happened, the negative answer concerning SCM’s intention,
preparedness, and capability to enter plain paper copying in 1964
eliminated the 1964 claim, regardless of the relevant market issues and
regardless of any SCM contention concerning the correctness of the
charge on issues of violation. Second, this course created the opportu-
nity to secure add
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