# Petition — SCM Corp. v. Xerox Corp. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_2264%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1982 - **Citation:** 455 U.S. 1016 ## Text 80-2092 + oe 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 pur [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_2264%3A1. Public record. Not legal advice.