Petition — Span-Deck, Inc. v. Fabcon, Inc.

Supreme Court brief1982

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6 No. cep ¥ oe

L. STEVAS.

IN THE CLERK

Supreme Court of the Gnited States

October Term, 1982

Span-Deck, Inc.,

Petitioner,

Vv.

Fabcon, Incorporated and Rauenhorst Corporation,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

John M. Mason

Counsel of Record

Stuart R. Hemphill

Michael J. Wahoske

Dorsey & Whitney

2200 First Bank Place East

Minneapolis, Minnesota 55402

Telephone: (612) 340-2600

Attorneys for Petitioner

1962—Nor.hwest Brief Printing Co., 3010 2nd St. No., Minneapolis 55411—588-7506

I. What is required by the relationship between federal

, patent law and state contract law when two patents con-

stitute part, but not all, of the consideration for a con-

tract awarding a franchise and one of the patents is de-

clared invalid: does federal patent policy bar a state from

enforcing a franchise contract despite the presence of

other substantial consideration for the franchise, includ-

ing another patent which is valid?

II. Does the mere assertion of patent invalidity as the

reason one induced another to breach a franchise con-

tract require that the question of justification for inducing

breach of contract be removed from jury consideration,

despite state law requirements of proof of actual motiva-

tion, good faith, and other factors before the defense of

justification is established?

III. In reviewing factual findings of a jury. is a court of

appeals permitted to employ a standard of review differ-

ent from the substantial evidence standard, despite the

frecepts of the Seventh Amendment and efficient judicial

administration, and instead make its own independent fac-

tual findings, contrary to those of the jury, concerning:

(a) the facts underlying the question of obviousness

in a determination of patent validity, where most

other courts of appeals require a substantial evi-

dence standard of review;

(b) the facts concerning the defense of justification

against a claim of tortious inducement of breach

of contract; and

ae SREY PTS Sh HPeIRAD AR Op

terms?

RN ae a od aie i Se a ae ae

Constitutional and Statutory Provisions Involved ....

eeeees Oe Ue CONE ogo kdb ba 08d ehveddccccess

Pon

The Span-Deck Process, Trade Secrets and Re-

NL Ss in a e446 babOEE Ces 0deeees

The Span-Deck Franchise System ..........

The Breach of the Franchise Contract ......

I oo ee te Bottiakece vel

Reasons For Granting The Writ .............-....

When A Patent Constitutes Part, But Not All, Of

The Consideration For A Franchise Contract,

Federal Patent Policy Does Not Bar A State

From Enforcing The Contract Where Other Sub-

stantial Consideration, Including Trade Secrets

And Another Valid Patent, Is Present, And The

Court Of Appeals Decision To The Contrary

Warrants Review By This Court. ...........

A. Prior Decisions Of This Court Require That

A Proper Accommodation Be Struck Be-

tween Federal Patent Law and State Law

So That State Law Is Only Preempted When

It Stands As An Obstacle To Achieving The

Purposes Of Federal Patent Law. ........ 10

RAM, 654 ccna theeers ess ace

tance Agreements And The Patent System. 17

II. The Court Of Appeals’ Decision That The Mere

Assertion Of Patent Invalidity As The Reason

One Party Induced Another To Breach A Con-

tract Requires Removal Of The Question Of Jus-

tification From The Consideration Of The Jury

And The Requirements Of State Law Is An Un-

warranted Extension Of Federal Preemption

Which Merits This Court’s Review. ......... 19

A. Under Minnesota Law The Existence of

Justification For Inducing Breach Of A

Contract Is A Jury Question. ........... 19

B. The Decision Of The Court Below Removes

The Question Of Justification From Jury

Consideration Contrary To Minnesota Law

And Without Support In Principles Of Pre-

CG. Sve seine couse bles 0 te vcewct 20

Ill. The Court Of Appeals’ Violation Of The Substan-

tial Evidence Standard Of Review Of Factual

Findings By A Jury, Which Standard Is Man-

dated By The Seventh Amendment Ard The Ef-

ficient Administration Of Justice, And Its Substi-

tution Of Its Own Independent Fact Findings On

Several Critical Matters, Call For Review By

pg Ne canna ya Sh ORE Ser 21

A. The Correct Standard Of Review Is Of Both

Constitutional And Juridicial Importance. 23

APPENDIX D:

APPENDIX E:

APPENDIX F:

APPENDIX G:

APPENDIX H:

APPENDIX I:

Opinion of the court of —,

dated May 12, 1982 ............ A-1

Memorandum and Order of the dis-

trict court, dated July 21, 1981 ..A-33

Special Verdict Form, dated Febru-

OE Sry Pek A-57

Order Nunc Pro Tunc of the district

court, dated March 10, 1981 ....A-65

Judgment of the court of appeals,

dated May 12, 1982 ........... A-67

Order of the court of appeals deny-

ing petition for rehearing, dated

fe RE TRG I A ee A-69

Constitutional and Statutory Provi-

eR ik ka< ac cks ews oh eae A-99

Subsidiaries of St. Regis Paper Com-

SD 6 o's 5 ch VENEERS oc Ub Oe o> A-101

TABLE OF AUTHORITIES

Cases:

American Surety Co. v. Schottenbauer, 257 F.2d 6

SE MEN: i060. 6c 8S knee ae bats ek Se svt

Aronson v. Quick Point Pencil Co., 440 U.S. 257 |

CR site aoe 848 ee ee 12, 13, 14, 15, 16, 17, 18

Atlantic & Gulf Stevedores, Inc. v. Ellerman Lines,

Ltd., 369 U.S. 355 (1962) .: 0... cess eeees 23, 25

Bennett v. Storz Broadcasting Co., 270 Minn. 525,

RSS Pelee ae Ne CAGE Kawa twee Cece neceeene 20

Brulotte v. Thys Co., 379 U.S. 29 (1964) ....... 11, 17

Carnes v. St. Paul Union Stockyards Co., 164 Minn.

G57, BOS PUW. GSO CASES << dics cicrcs scccecubees 20

Contico International, Inc. v. Rubbermaid Commer-

cial Prod., 665 F.2d 820 (8th Cir. 1981) ........ 29

Control Components, Inc. v, Valtek, Inc., 609 F.2d

763 (Sth Cir.), cert. denied, 449 U.S. 1022 (1980) . 26

Dual Manufacturing & Engineering, Inc. v. Burris In-

dustries, Inc , 619 F.2d 660 (7th Cir.), cert. denied,

449 US. 870 PONS 6 dled Wsawerk bale lee waves 26

Graham v. John Deere Co., 383 U.S. 1 (1966) ...... 24

Hines v. Davidowitz, 312 U.S. 52 (1941) .......... 15

International Terminal Operating Co., Inc. v. N.V.

Nedrl. Amerik Stoom v, Maats., 393 U.S. 74 (1968) 25

Johnson v. Raade, 293 Minn. 409, 196 N.W.2d 478

PFE Rav ve tN oc ein cba wee tere esececaes 19-20

RUNG oh ae ea eh et PAR: 22

Kewanee Oil Co. v. Bicron Corp., 416 US. 470 (1974)

ROPE CREST Nes cdpeep anne 10, 13, 14, 16, 17, 19, 20

Lavne-New York Co. v. Allied Asphalt Co., 501 F.2d

405 (3rd Cir. 1974), cert. denied, 421 U.S. 914

te GENRES = pas 26

Lear, Inc. v. Adkins, 395 U.S. 653 (1969) ..........

egecovecs 9, 11, 12, 14, 15, 16, 17, 18, 19, 20, 21

Lumbermen’s Mutual Casualty Co. v. Elbert, 348 U.S.

DPE is 6-6 nab ete bemeess ob aa be cacvccdee 23

Maloney v. Madrid Motor Corp., 385 Pa. 224, 122

PEED cdiwedllece + cbebtrocceceVeuer 22

Norfin, Inc. v. International Business Mach. Corp.,

625 F.2d 357 (10th Cir. 1980) .........-6.065. 25

Parsons v. Bedford, Breedlove & Robeson, 28 U.S.

SD GP ED vo v dnbinvesccenecceoscbeucs 23

v. New York Life Ins. Co., 181 F.2d 136

GEE Cie, BEBE cb vc cckovcencccedecceccccens 29

Rankin v. Fidelity Trust Co., 189 U.S. 242 (1903) .. 22

Royal Realty v. Levin, 244 Minn. 288, 69 N.W.2d

Ge MED oscrcccpeawbarpenetdes csovesceins 20

St. Regis Paper Co. v. Royal Industries, 552 F.2d 309

-» (9th Cir.), cert. denied, 434 U.S. 996 (1977) ..15, 16

Co. v. E. 1. duPont de Nemours & Co., 579

eo on sn vances swab aees 22

Smith v. American Guild of Variety Artists, 349 F.2d

975 (8th Cir. 1965), vacated and remanded for re-

consideration on other grounds, 384 U.S. 30 (1966),

original opinion readopted and reaffirmed in all re-

spects, 368 F.2d 511 (8th Cir.), cert. denied, 387

SG I ear 2 ie ae oe 20

Tights, Inc. v. Acme-McCrary Corp., 541 F.2d 1047

(4th Cir.), cert. denied, 429 U.S. 980 (1976) ...... 26

US. for Use and Benefit of Smith v. Maryland Cas-

ualty Co., 146 F.2d 379 (Sth Cir, 1946) ......... 22

Velo-Bind, Inc. v. Minn. Mining & Mfg. Co., 647 F.2d

965 (9th Cir.), cert. denied, ——- US. ——, 70

ONE CUE ac catwee ve chee ceccadtodd 25

Wolfson v. Northern States Management Co., 210

Minn. 504, 299 N.W. 676 (1941) ..........+6.. 21

Constitutional Provisions and Statutes:

U.S. Const, Amend. VII .......... 2, 21, 23, 25, 26, 29

i Mi dé6bsscccedeceuwdbestsccvdedbe 7

ee Ue OP EEUU 's o'c'n Ud o's Sédbebedocdecdis 2

en GED 6 b.n'b Ken ccdedochvasccedeccdbi 7

EEE FP GUUEEED él.cc ven cepebbodierecscecdee 7

ST rn occcncudsdehtesbebscccee die 7

SD 2 ccc cbodtiveveccibestbcdocdhé 7

28 U.SC. § 1338(b) ............ tacliudedeecete 7

OED cbdiescteticeenstebudeceosyt 2, 24

Dt Mr tid hvweducegesbehedessoe che} 2, 28

i) My dah 6-6 tees 6obneed és Ubisesced 2, 28

Rules:

ee a 6g auidds 6 édbdinte ode ouce 29

Other Authorities:

17 C.J.S, Contracts § 130 (1963 & Supp. 1982) .... 15

17 C.J.S. Contracts §131 (1963 & Supp. 1982) ..... 15

3 Corbin, Contracts § 554 (1960) ............... 22

ee eee

tions, § 18.04 “Technical Assistance Agreements” .

earn, ening i Forign a Dome Ope

tions, § 18.05 “Combination License Agreements” 18

vii

IN THE

Supreme Court of the Anited States

October Term, 1982

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Span-Deck, Inc. (“Span-Deck”)’ respectfully petitions

for a writ of certiorari to review the judgment of the

United States Court of Appeals for the Eighth Circuit en-

tered in this case on May 12, 1982.

OPINIONS BELOW

The opinion of the district court (App. B) dated July

21, 1982 is unreported. The opinion of the court of ap-

peals (App. A) is reported at 667 F.2d 1237 (8th Cir.

1982).

kenge aie am defence

ing on May 26, 1982. The petition for rehearing was

denied on June 7, 1982 (App. F). This Court has jurisdic-

tion to review the judgment of the court of appeals by writ

of certiorari pursuant to 28 U.S.C. §1254(1).

Set forth in Appendix H are pertinent provisions of the

Seventh Amendment to the Constitution of the United

States and the Patent Act, 35 U.S.C. §§ 103, 112, and

282.

This case involves an attempt to enforce a franchise

contract, and to collect darmages for its breach and for the

wrongful inducement to breach the contraci. The jury and

the district court found in favor of Span-Deck and awarded

compensatory damages of $1.5 million and punitive dam-

ages of $2 million.

The Court of Appeals for the Eighth Circuit reversed

the judgment of the district court. It concluded. on the

basis of its own factual findings, that one of the patents

which had been licensed under the franchise contract

should have been found invalid by the jury and the dis-

trict court; that since it had found the patent invalid, a

franchise contract which referred to it could not be en-

forced because to do so would be inconsisent with feder-

al patent policy; and that conduct in inducing the breach

of the franchise contract was justified by the assertions of

patent invalidity, without regard to actual motivation or

good faith.

The remand of the court of appeals recognized the val-

ue and transfer of trade secrets, another valid patent,

and other non-patent consideration for the franchise con-

tract, but remanded for a determination of the value of

nonpatent rights and damages for misappropriation of trade

secrets rather than enforcement of the contract.

A. The Span-Deck Process, Trade Secrets and

Related Patents.

The Span-Deck franchise contract enables one to engage

in the manufacture of prestressed, precast hollow core

concrete plank. The Span-Deck franchise is one of several

competing franchise systems for the casting of such plank.

It is the hollow core feature of such plank which makes

the concrete panels sufficiently lightweight and inexpen-

sive to be competitive with other building materials. The

means by which the hollow cores are formed is among the

items which distinguishes Span-Deck from its competitors.

Span-Deck’s method and equipment are protected by its

trade secrets. It has also acquired two patents covering

certain aspects of its equipment: one issued in 1965 to

Claiborne Kinnard, and another issued in August, 1970,

to William Mitchell.

Claiborne Kinnard developed an apparatus and method

wherein a moving casting machine deposits liquid con-

crete around cores of lightweight granular core material,

which passes through slipforms shaping the cores. The

slipforms simultaneously shape the liquid concrete to sur-

round highly tensioned steel cables extending from end to

end of a stationary casting bed. Enormous tensile forces

and weights are necessarily involved. The planks are man-

ufactured as continuous hollow bodies in long casting beds.

After curing, individual planks are cut from these long

beds. The cores are made hollow by dumping out the gran-

ular core material after the concrete has hardened.

Williem Mitchell’s improvement on Kinnard’s inven-

tion fixed the casting apparatus in place and devised a

means by which the bed upon which the concrete was

placed could be moved as required for various plank pro-

duction steps. This improvement solved the even greater

material handling problems which arose when wider and

longer casting beds were employed, requiring a precise

means for moving and controlling a large casting bed in

coordination with the stationary casting, curing, cutting,

bed stripping, and bed cleaning equipment, and the stock-

piling and centralized use of the production materials.

B. The Span-Deck Franchise System.

Since the beginning in 1964, each franchise contract

has taken the form of a technical assistance agreement

licensing unpatented experience and knowledge, know-

how and trade secrets, and trademarks. When the patents

were issued in 1965 and 1970, franchise contracts also in-

cluded rights under those patents.

The Span-Deck franchise fee was established in 1964

before it had any patents, and it has never been adjusted

for any reason, except for an inflation increase in 1980.

The franchise fee under the contracts entered into before

cents per square foot of plank produced, declining

higher production. The franchise fee under the contracts

entered into after each patent issued required the same

royalty, which was not raised or altered in any way in 1965

or 1970 when Span-Deck acquired its patents.

By the summer of 1970, when negotiations for the Span-

installation of approximately 20 plants in the U.S. and

Canada, all requiring the same royalty rate.

Cc. The Breach of the Franchise Contract.

Span-Deck and Fabcon, Incorporated (“Fabcon”) en-

tered into a franchise contract (App. G) on October 7,

1970. Fabcon prospered under its Span-Deck franchise.

It was in commercial operation within ten months of sign-

ing the contract. It doubled its capacity a year and a half

later.

In spite of ‘ts financial success, early in 1972 Fabcon

and Rauenhorst Corporation (“Rauenhorst”), of which

Fabcon is a wholly-owned subsidiary, began to take steps

to avoid the obligations under the franchise, steps which

were inconsistert with the contract. These actions began

about one year before the cessation of royalty payments in

1973.

In March, 1972, David Hanson, Fabcon’s President,

wrote to a business associate that he was not promoting

his plant’s products as Span-Deck planks, but rather as

“Fabcon slabs”, contrary to Paragraph 3.5 of the fran-

chise contract (App. G, p. A-76). In August, Fabcon tried

to hire Larry Foster, a key Span-Deck engineer. In Sep-

tember. Hanson wrote a memorandum to Gerald Rauen-

horst, President of Rauenhorst Corporation, discussing

methods “[t?hat might be a way to get out of the royalty.”

In November. Hanson took steps to keep process improve-

ment information from being disclosed to Span-Deck as

required by Paragraph 4.5 of the franchise. (App. G, p.

A-78). The continued success of this effort to withhold in-

formation was reported to Rauenhorst in late February,

1973.

Fabcon made its last royalty payment to Span-Deck in

January, 1973, covering December, 1972 production. At

first, Fabcon offered no explanation. On March 5, 1973,

Hanson wrote that Fabcon had stopped paying because

Fabcon was supposedly entitled to a credit under a “most-

favored-licensee” clause of the franchise contract. In fact,

Fabcon was having cash flow problems when it stopped

paying royalties.

On April 30, 1973, Gerald Rauenhorst met with Ed

McMahon, an officer of Span-Deck’s parent company.

Rauenhorst proposed termination of the franchise, claimed

that Span-Deck’s patents were invalid or not infringed,

and threatened to tell other franchisees of his position if

the franchise contract was not terminated. (This is the only

evidence that cessation of royalty payments had any re-

lationship to patents). In a subsequent telephone conver-

sation, McMahon told Gerald Rauenhorst shat Fabcon

had “a franchise agreement above and beyond the pa-

tents” and that Span-Deck had certain rights and obliga-

tions under the franchise.

D. Commencement of Suit.

Fabcon continued in its refusal to pay royalties, but

also continued to exercise its privileges under the fran-

chise contract. Span-Deck did not agree to terminate the

franchise. It brought suit against Fabcon and Rauenhorst

in the United States District Court for the District of Min-

nesota on November 1, 1973." Span-Deck’s primary

claims, stated in Counts I and Il of its Complaint, were

for breach of the franchise contract, and for tortious in-

ducement of the breach.”

The Answer and Counterclaim generally denied the

principal allegations in the Complaint and asseried af-

firmative defenses as to the alternative claims for patent

infringement. It also sought a declaratory judgment that

the franchise contract was not valid or enforceable due to

alleged failure of consideration by treason of the alleged

invalidity of the Kinnard and Mitchell patents.

At the time this suit came to trial late in 1980, Span-

Deck had 40 active franchises, including franchises in

such foreign countries as Canada, Hungary, Finland,

Spain, Japan, Dubai, Australia and Venezuela. Other than

Fabcon, no franchisee has ever asserted patent invalidity,

nor sought to avoid its franchise contract obligations to

Span-Deck.

E. The Results of the Jury Trial and Post-Trial

Motions.

After extensive discovery and pretrial motions, the mat-

ter was tried to a jury of ten persons’ commencing on

*The district court's jurisdiction was based on 15 U.S.C. § 1121, 28

U.S.C. $§ ae (), and (c), and 28 USC. 8§ 1338(a) and (b).

“it might be determined that the contrac pen

Fabcon and Span- was not in effect by reason of expiration,

cancellation or . Count III: unauthofized use of Span-Deck’s

November 17, 1980. On February 9, 1981, after almost

forty days of trial, the jury was charged and presented

with 22 Special Verdict questions. After a week of de-

liberation, the jury returned with its answers to the Special

Verdict form (App. C).

After ruling on post-trial motions, on July 21, 1981,

the district court entered its Memorandum and Order (App.

B). That judgment enforcing the jury’s Special Verdict

awarded compensatory damages of $1.5 million against

Fabcon and Rauenhorst for breach of contract, and exem-

plary damages of $2 million against Rauenhorst for in-

ducement of the breach; the Kinnard patent, though valid,

was held not infringed by the equipment used by Fabcon.

The Mitchell patent was held valid and infringed.

F. The Decision of the Court of Appeals.

Defendants appealed from the judgment of the district

court. In an opinion dated May 12, 1982, a divided panel

of the Court of Appeals for the Eighth Circuit vacated the

judgment of the district court and reversed and remanded

the case.

The court determined that federal patent policy barred

enforcement of the Span-Deck/Fabcon franchise contract

because it included rights under an invalid patent among

the benefits conferred by the contract. It also determined

that the mere assertion of patent invalidity was sufficient

to remove the question of justification for inducing the

breach of contract from jury consideration, despite state

law requirements of proof of actual motivation, good faith,

and other factors.

In reaching these conclusions, the court determined that

the Mitchell patent should have been held invalid, and

reversed other factual determinations, based on its own

view of the facts, which was contrary to the findings of the

jury as separately confirmed by the trial court.

Finally, the court of appeals affirmed the validity of tic

Kinnard patent and remanded “for a determination of the

value of nonpatent rights received by Fabcon from the time

Fabcon ceased payment of royalties until termination of

the contract on October 6, 1975,” and “a determination

of damages for misappropriation of trade secrets after the

contract termination.” (App. A, p. A-27).

When A Patent Constitutes Part, But Not All, Of The

Consideration For A Franchise Contract, Federal

Paent Policy Does Not Bar A State From Enforcing

The Contract Where Other Substanial Considera-

tion, Including Trade Secrets And Another Valid

Patent, Is Present, And The Court Of Appeals De-

cision To The Contrary Warrants Review By This

Court.

In denying enforcement of the franchise contract be-

tween Span-Deck and Fabcon, the court below justified its

decision primarily by reference to Lear, Inc. v. Adkins, 395

U.S. 653 (1969). In doing so, the court below improperly

extended Lear beyond its holding that a patent licensee is

not estopped to challenge the validity of a licensed patent

and may withhold royalties while doing so. The result is

an unwarranted preemption, in the name of federal patent

law, of state contract law permitting the enforcement of

otherwise valid contracts. The scope of the rule proncunced

in the decision of the court below jeopardizes a large class

of existing legitimate business relationships and dis-

courages parties from entering into franchises or technical

assistance agreements where a patent or patent applica-

tion covers a portion of the technology involved. It is also

likely to discourage use of the patent system.

A. Prior Decisions of This Court Require That a

Proper Accommodation be Struck Between

Federal Patent Law and State Law so that

State Law Is Only Preempted When it Stands

as an Obstacle to Achieving the Purposes of

Federal Patent Law.

The history of this Court’s recent decisions delineating

the proper relationship between federal patent law and

state law shows the difficulty and importance of mapping

out the area of preemption so as to adequately balance the

interests of federal patent law against the compelling tradi-

tion that parties are free to contract for patent or other

intellectual property rights in exchange for mutually agreed

compensation. Although not first in time among those

decisions, Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470

(1974), perhaps best exemplifies the standards which this

Court has used to determine the proper accommodation

between federal patent law and state law when the two

appear to clash. In Kewanee, the Court held that state

trade secret protection was not preempted by operation of

the federal patent law. In reaching this conclusion, the

Court analyzed the objectives of both the federal and state

laws, see 416 U.S. at 480-482, and examined the interac-

tion of the two systems, see id. at 482-492, before deter-

mining whether and under what circumstances preemp-

tion might apply. The Kewanee Court thus both ruled

that state law is not automatically preempted by patent

law in the area of protection of intellectual property and

set forth by example the kind of analysis which must

underlie a decision that state law is preempted. The sum-

mation of that analysis is the standard that state law gov-

erns except to the extent that it stands as an obstacle to

frustrate the policies of the federal patent law.

This general standard exemplified by Kewanee under-

lies the Court’s other recent decisions as well. Thus, in

Brulotte v. Thys Co., 379 U.S. 29 (1964), the Court ex-

amined contracts involving licensing of patented hop

picking equipment in exchange for royalties based on use

cr production. The contracts provided that royalties were

to be paid beyond the life of the patents involved. The

Court held that such contracts extended the patents un-

lawfully and were unenforceable as to post patent expira-

tion royalties. The conflict between the limited seventeen

year patent term and the extended royalty obligation

made preemption necessary.

In Lear v. Adkins, supra, the Court was asked to rule

on the viability of the doctrine of licensee-estoppel, which

had been invoked by a licensor to try to force a licensee to

pay royalties while the licensee challenged the license on

the issue of patent validity. The court specifically found

requiring continued payment of royalties to be “inconsis-

tent with the aims of federal patent policy.” 395 U.S. at

673. It referred to the importance of giving patent licen-

sees an economic incentive to challenge patents. The case

also involved a claim for contractual royalties due before

the patent issued, i.c., during the period when the licensed

technology was an unpatented secret idea. The Court con-

cluded

“that even though an important question of federal

law underlies this phase of the controversy, we should

not now attempt to define in even a limited way the

extent, if any, to which the States may properly act

to enforce the contractual rights of inventors of un-

patented secret ideas.”

395 U.S. at 675. Justice White, concurring in part, focused

even more directly on the federal law-state law tension

presented by the case:

One of the defenses nresented by Lear in its answer

to Adkins’ claim for zoyalties was that there had

been a failure of consideration because of the ab-

sence of bargained-for patentability in Adkins’ ideas.

But failure of consideration is a state law question,

and I find nothing in the record and nothing in this

Court’s opinion indicating that Lear at any time con-

tended in the state courts that once Adkins’ patent

rvas invalidated the royalty agreement was unenforce-

able as a matter of federal law.

395 U.S. at 679 (footnote omitted).

In Aronson v. Quick Point Pencil Co., 440 U.S. 257

(1979), the Court had occasion to examine another deci-

sion by the Eighth Circuit which, like the one here pre-

sented to this Court for review, also involved an interpre-

tation of the rule in Lear. In Aronson, a licensee challenged

its duty to pay royalties under a license contract when the

licensor’s invention, originally licensed as a trade secret,

failed to achieve patent protection. The contract con-

templated continued royalties at a reduced rate were no

patent obtained and without regard to the fact that no

trade secret existed once the licensed keyholder was sold.

The licensee argued that the Lear case prevented enforce-

ment of the contract. The district court had held the con-

tract valid, while the Eighth Circuit held it invalid, based

on Lear. In its consideration, this Court noted that the

matter again called for a resolution of tension between

state contract law and federal patent law:

440 U.S. at 262 (citations omitted). After weighing the ef-

fect enforcement of such a contract would have on the

policies of patent law, this Court concluded that federal

law was no barrier to contract enforcement.

In its preemption analysis in Aronson, the Court fe-

viewed the same purposes of the federal patent system

which it had identified in the Kewanee case:

First, patent law seeks to foster and reward inven-

tion; second, i

to practice the invention once the patent expires;

third, the stringent requirements for patent protec-

tion seek to assure that ideas in the

440 US. at 262. After analyzing the effect of enforcement

of the Aronson-Quick Point contract on each of the pur-

poses, the Court concluded that the contract was not in-

consistent with any of these aims.

Aronson thus stands for the proposition that, where

the parties separately stated in the contract what non-

patent consideration was involved in the event patent-based

consideration failed, federal patent law did not require

that the contract be voided. “The cases and principles

[including the Lear rule] relied on by the Court of Ap-

peals and Quick Point do not bear on a contract that does

not rely on a patent, particularly where, as here, the con-

tracting parties agreed exp: »ssly as to alternative obliga-

tions if no patent should issue.” 440 U.S. at 262. Although

hinting at the appropriate result even where no such ex-

press statement of alternative consideration has been made,

the Court did not rule on the appropriate result in a situa-

tion where a patent forms only a part of the contract con-

sideration but the parties have not expressly apportioned

the consideration involved.

B. The Decision of the Court Below is Based on

the Erroneous Concept of a Hybrid Royalty

Rather Than a Proper Preemption Analysis.

The question which this Court did not have to reach

in Aronson was presented to the Eighth Circuit in this

case. Even as it had done in Aronson, the Eighth Circuit

enswered the question by looking to its erroneous inter-

pretation of Lear rather than engaging in the kind of care-

ful analysis exemplified by Kewanee and reiterated in

Aronson.

The court of appeals’ initial error was failing to clearly

identify and give proper consideration to the result re-

quired by state law. In particular, the decision simply sets

to one side the jury’s finding that the contract was sup-

ported by considerations other than patents. (See App. C,

p. A-57). The decision also overlooks the facts that two

patents were licensed, that only one was found invalid, and

that Fabcon also received trade secrets and continues to

use them. It also overlooks the other technical assistance

materials and services and the trademark rights provided in

paragraphs 2.1 to 2.7 of the contract (App. G, pp. A-71-

A-73). Thus, the franchise is clearly supported by considera-

tion, even if the Mitchell patent is, ultimately, held invalid.

be paid in full. See, e.g., 17 C.J.S. Contracts §§ 130-131

(1963 & Supp. 1982) and cases cited therein.

These matters of consideration and enforceability were

not addressed by the court below. More importantly, the

consequences of enforcing such a contract were not tested

to see if they actually stand as obstacles to the goals of

federal patent policy, as required before finding nreemp-

tion. See, Hines v. Davidowitz, 312 U.S. 52, 67 +1).

Instead, the Eighth Circuit made the same ‘ype of error

that Lear requires the invalidation of any contract which

contemplates a valid patent if no such patent obtains.

The analysis of the court below was based on the con-

Industries, 552 F.2d 309 (9th Cir.). cert. denied, 434 US.

996 (1977), as an extension of the Lear case. In the

given. When the licensor attempted to collect half the con-

tractual royalty based on know-how received by the licensee,

the Ninth Circuit examined the termination provision and

found the patent rights and the know-how “so intimately in-

patent rights uncollectible if the patent is invalid should

apply with equal force to know-how.” 552 F.2d at 315.

The provision requiring notice of termination was thus

held unenforceable both for patent rights and for know-

how. The Ninth Circuit denied the licensor’s know-how

royalty claim and approved the district court's determin-

ation that the licensor’s compensation for the value of the

know-how was covered by previously paid royalties. While

the Ninth Circuit cited Lear, its preemption analysis was

limited to consideration of the licensee's claimed resti-

tution remedy. It did not measure the effect of enforcing

the contract as to nonpatent consideration against the

purposes of federal patent law but rather against the

intent of the parties in their termination provision.

In the instant case, the court below took Lear, together

with St. Regis, as grounds for condemning all contracts

in which the royalty is “hybrid” in the sense that a patent

forms any part of the consideration for the coptract. It

concluded that allowing enforcement of any such contract

would prevent the “unmuzzling” of royalties to aid li-

censees in patent challenges in accordance with Lear.

(App. A, p. A-23). This rule is too broad. It fails to strike

2 reasonable and reasoned balance between state contract

law, which supports the expectation that a contract will

be enforceable, and the purposes of federal patent law.

The rule stated by the court below is not required by the

Lear case, nor is it consonant with the Kewanee or Ar-

onson cases, which show the manner in which a preemp-

tion analysis must proceed. The Kewanee case, which

upholds an entire body of state trade secret law as against

& Claim of preemption by federal paten: law, not only sets

forth the required analysis but, a fortiori, states the re-

quired result. See Aronson, supra, 440 US. at 265.

To paraphrase this Court’s observation in Aronson,

“[njo decision of this Court relating to patents justifies

relieving [Fabcon] of its contract obligations.” 440 U.S.

at 264. No attempt is made here to extend a patent

beyond its 17 year life. Cf. Brulotte, supra. No state

law doctrine prevented Fabcon from challenging the

Cf. Lear, supra. On the other hand, the Eighth Cir-

cuit’s “hybrid royalty” rule, derived not from the Kewanee

analysis but from the Eighth Circuit's own misapprehen-

which has a franchise or technical assistance agreement

involving a “hybrid royalty” to be paid in exchange for a

license of rights to one or more patents in combination

with other consideration’ will face chriienges from licen-

sees who are aware of the long lis of available patent

invalidity defenses and who wish to stop paying royalties

by, in effect, asking a federal court to renegotiate their bar-

gain. Third, parties who license a package of unpatented

technology will be discouraged from pursuing patent

protection, if the protection sought is anticipated to be

part of their licensed subject matter. Fourth, parties who

plan to license a technica] assistance package including

patented technology will look for artificial ways to keep

patent rights out of their agreement, lest the entire bar-

gain be later challenged, based on an invalidity claim

egainst the patent license portion of the consideration.

Fifth, parties who license a technical assistance package

including patents will be forced to artificially segregate

patent and non-patent consideration, with separate royal-

ties for each.

The Eighth Circuit’s woodenly derived and erroneous

answer to the question left open by Lear and Aronson

thus stands as a foreboding precedent in a very significant

field. The jurisdiction of this Court should be exercised

to affirm the procedures for determining preemption pre-

viously stated by this Court and to clearly define the ex-

tent to which federal patent law may preempt state con-

cract law to deny enforcement of a contract supported by

consideration other than a patent later declared to be in-

The Court of Appeals’ Decision that the Mere Asser-

tion of Patent Invalidity as the Reason One Party

Induced Another to Breach a Contract Requires

Removal of the Question of Justification from the

Consideration of the Jury and the Requirements

of State 'aw is an Unwarranted Extension of Fed-

eral Preemption Which Merits this Court's Review.

The decision of the court of appeals to rely on the

Lear case also led to its reversal of Span-Deck’s judgment

against Rauenhorst for interfering with the contract be-

tween Span-Deck and Fabcon. The court of appeals es-

tablished Rauenhorst’s justification defense as a matter of

law. It concluded that since cessation of royalties was

justified under Lear, Rauenhorst’s actions were “justifi-

able under the circumstances” and that a directed verdict

or j.n.o.v. should have been granted in its favor (App. A,

p. A-19).

This decision had the effect of preempting state tort

law under which liability for interference with contract is

established, but the court of appeals, ignoring Kewanee,

failed to consider whether federal patent policy re-

quired such preemption.

A. Under Minnesota Law the Existence of Justi-

fication for Inducing Breach of a Contract is

a Jury Question.

Minnesota law on the issue of justification inducing

breach of contract is clear. First, justification is an af-

firmative defense, and the burden of proof is on the party

accused of inducing breach. Johnson v. Raade, 293 Minn.

409, 196 N.W.2d 478 (1972); Royal Realty v. Levin,

244 Minn. 288, 69 N.W.2d 667 (1955); Carnes v. St.

Paul Union Stockyards Co., 164 Minn. 457, 205 N.W.

630 (1925). Second, what constitutes justification in a

specific case is for the jury to decide. Minnesota courts

have not attempted to formulate a rule by which justifica-

tion or lack of justification may be determined, but have

said that in general the issue is largely one of fact for the

jury, the standard being reasonable conduct under all

the circumstances of the case. Bennett v. Storz Broadcast-

ing Co., 270 Minn. 525, 537, 134 N.W.2d 892, 900

(1965). Accord, Royal Realty v. Levin, supra; Carnes v.

St. Paul Union Stockyards Co., supra, The Eighth Circuit

has acknowledged that justification is a jury issue in Min-

nesota. Smith v. American Guild of Variety Artists, 349

F.2d 975 (8th Cir. 1965) vacated and remanded for re-

consideration on other grounds, 384 U.S. 30, original

opinion re-adopted and re-affirmed in all respects, 368

F.2d 511 (8th Cir. 1966), cert. denied, 387 U.S. 931

(1967); American Surety Company v. Schottenbauer, 257

F 2d 6 (8th Cir. 1958).

B. The Decision of the Court Below Removes the

Question of Justification from Jury Consider-

ation Contrary to Minnesota Law and With-

out Support in Princip:es of Preemption.

The court of appeals concluded that interference with

the contract was justified by Lear. This is contrary to the

approach taken by this Court in Kewanee, which, rather

than merely invoking Lear, carefully evaluated federal

patent law policy against the particular state tort law in-

volved. Nor can it be assumed that whatever mat-

ters of federal patent policy the court of appeals re-

lied on to preempt Span-Deck’s contract claim would be

equally applicable to the tort claim for interference. It

is also a principle of Minnesota law that the issue of jus-

tification involves consideration of the defendant’s good

faith. Wolfson v. Northern States Management Co., 210

Minn. 504, 299 N.W. 676 (1941). Even if Lear might, as

a matter of legal principle, be available as a justification

for a party inducing breach, the jury question of

whether this claimed justification was the good faith mo-

t've of the defendant remains.

Use of the Lear case in the manner chosen by the

' court of appeals establishing a scope of preemption for

federal; patent law which has serious consequences for

tort law in Minnesota and other states. Whether such a

decision can be supported by principles of federal pre-

'- emption is a question which merits consideration by this

Court. This is particularly so because it affects parties’

rights to have their cases determined by juries.

The Court of Appeals’ Violation of the Substantial

Evidence Standard of Review of Factual Findings

by a Jury, Which Standard is Mandated by the

Seventh Amendment and the Efficient Adminis-

tration of Justice, and Its Substitution of Its Own

independent Fact Findings on Several Critical

Matters Call for Review by This Court.

The decision below rests on three key fact findings,

findings made independently by the court of appeals in

direct contradiction to the facts as determined by the

jury and separately confirmed by the trial court, following

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incorrect standard of review on appeal. These appellate

errors are of serious magnitude both because they contra-

affect the administration of justice and the perception

thereof.

A. The Correct Standard of Review Is of Both

Constitutional and Juridical Importance.

As this Court has long recognized, “[a]ppellate re-

view in the federal courts is, of course, limited ultimate-

ly by the Seventh Amendment.” Lumbermen’s Mutual

Casualty Co. v. Elbert, 348 U.S. 48, 53 n. 5 (1954),

citing Parsons v. Bedford, Breedlove & Robeson, 28 U.S.

(3 Pet.) 433 (1830).

We might agree with the Court of Appeals had the

question uf fact been left to us. But neither we nor

the Court of Appeals can redetermine facts found by

the jury any more than the District Court can pre-

determine them. For the Seventh Amendment says that

“no fact tried by a jury, shall be otherwise reexamined

in any Court of the United States, than according

to the rules of the common law.”

Atlantic & Gulf Stevedores, Inc. v. Ellerman Lines, Ltd.,

369 U.S. 355, 358-359 (1962).

The correct standard to be applied for appellate review

of jury-determined facts is thus a matter of constitutional

importance. It is also a matter important to the effective

administration of justice. Standards of appellate review

which, by their terms or in application, liberally allow re-

examination of a jury’s factual findings encourage appeals

to be undertaken simply in the hope that another “fact

finder” might see things differently. This contributes not

only to crowded dockets in the courts of appeals - and

ultimately this Court - but, to the extent such standards

permit properly instructed jury verdicts to be overturned,

the efficient use of scarce judicial resources is frustrated.

In the instant case, for example, eight weeks of trial for

the litigants, the court, and the jury were rendered super-

fluous by an appellate court which decided to engage in

its own independent fact finding, and yet another exten-

sive trial will follow the remand. Such results cannot

but adversely affect the perceptions of litigants and the

public at large of the fairness and effectiveness of the ad-

ministration of justice.

Thus, for both constitutional and juridical reasons, where

there is disagreement over the proper standard of re-

view, or where an improper one has been applied, this

Court should exercise its jurisdiction to articulate the

appropriate standard for appellate courts to follow.

8. There is Disagreement in the Circuits Over

the Standard of Review of Jury Findings on

the Issue of Obviousness.

_ In Graham v. John Deere Co., 383 U.S. 1 (1966), this

Court explained the nature of the determination of non-

obviousness required under § 103:

While the ultimate question of patent validity is one

of law, . . . the § 103 condition, . . . lends itself to sev-

eral basic factual inquiries. Under § 103, the scope

and content of the prior art are to be determined;

differences between the prior art and the claims at

issue are to be ascertained; and the level

ary skill in the pertinent art resolved. Against this

background, the obviousness or nonobviousness of the

subject matter is determined.

Id. at 17.

The determination of nonobviousness thus involves

both questions of fact and questions of law, and the an-

swers to the fact questions become the predicates upon

which the legal answers must be based. When fact ques-

tions are submitted to and answered by a properly in-

structed jury, the Seventh Amendment requires that the

answers given not be reexamined, except in accordance

wth the principles of the common law. The proper

standard for appellate review of jury-determined facts

is the “substantial evidence” test: If the reviewing court

finds substantial evidence supporting the jury’s determin-

ation, it must be accepted and not otherwise questioned

or “reexamined.” See Atlantic & Gulf Stevedores, Inc. v.

Ellerman Lines, Ltd., supra, 369 U.S. at 364; Interna-

tional Terminal Operating Co., Inc. v. N. V. Nederl.

Amerik Stoomv. Maats., 393 U.S. 74, 75 (1968) (per

curiam).

In the context of patent law, and with particular re-

gard to the question of nonobviousness, several circuits

have recognized that jury-determined facts must be up-

held on appellate review if supported by substantial evi-

dence. See, e.g., Velo-Bind, Inc. v. Minn. Mining & Mfg.

Co., 647 F.2d 965, 971 (9th Cir.), cert. denied, —— U.S.

——, 102 S.Ct. 658 (1981) (“Although the conclusion

of validity is ultimately one of law, the jury’s findings of

fact, which underlie this legal conclusion may not be over-

turned on appeal if supported by substantial evidence.”);

Norfin, Inc. v. International Business Mach. Corp., 625

F.2d 357 (10th Cir. 1980); Control Components, Inc. v.

Valtek, Inc., 609 F.2d 763 (Sth Cir.), cert. denied, 449

U.S. 1022 (1980); Tights, Inc. v. Acme-McCrary Corp.,

541 F.2d 1047 (4th Cir.), cert. denied, 429 U.S. 980

(1976).* Other circuits, however, appear to have ignored

the strictures of the Seventh Amendment; they hold that

the reviewing court may make its own independent

analysis of the underlying facts and thus reexamine the

jury’s determinations unrestricted by the substantiality

of the evidence supporting them. See, e.g., Dual Manu-

facturing & Engineering, Inc. v. Burris Industries, Inc.,

619 F.2d 660 (7th Cir.) (en banc), cert. denied, 449 U.S.

870 (1980); Layne-New York Co. v. Allied Asphalt Co.,

501 F.2d 405 (3rd Cir. 1974), cert denied, 421 US.

914 (1975).

Involving as it does both a critical part of the statutory

vest of patent validity and the precepts of the Seventh

Amendment, this disagreement in the circuit courts of ap-

peals over the proper standard of review for jury-de-

"The explication by the Fourth Circuit in Tights, Inc. v. Acme-McC;

Core. a sai F.2d at 1055-6 (citations omitted) wes not followed

by Eighth Circuit in the instant case. It bears repeating here:

We begin with the observation that the rules governing

review of patent cases are no different than in other

passing on

the question becomes whether there was sufficient evidence

This case squarely presents the Court with an oppor-

tunity to resolve that disagreement by articulating the

of the evidence supporting this jury determination, inde-

area, and sort of unloading area is inherent in any product

based assembly-line format such as that

disclosed in the Mortimer patent” Cape ae Aw ”

curately moving and controlling the casting bed along

the track were sufficiently described by prior art so that a

person skilled in the art could practice the Mitchell inven-

tion.” (App. A, pp. A-12-A-13. Compare App. C, p. A-62,

Special Verdict Nos. 16, 18).

Nowhere in its analysis of the factual issues on which

(App. A, pp. A-29-A-30).”

Inasmuch as the reexamination of jury-determined facts

1s involved, which standard of review is applied is of ser-

ious moment. What the Eighth Circuit itself has recog-

“In 80, the court below also stepped outside of the record. It re-

lied on U.S. Patent No. 786, (see App. A, p. A-13), which was not

in evidence and was never eS oe aot We See

dants under the requirement radiate:

the court below the requirement of 35 U.S.C. § 112, which

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construed to cover the corresponding structure or acts described in

the specification and equivalents thereof. Pursuant to this rule, the

nized with regard to the standard to be applied to fac-

tual determinations made by a trial court is, if anything.

more true in the instant context of a jury verdict:

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CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

John M Mason