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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1982
- **Citation:** 459 U.S. 981

## Text

wr PILED
2-399
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

(c) the facts establishing whether a franchise contract

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

A.

Pon

F.

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 .............-....
I.

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
C.

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

vi

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-

3

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-

4

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-

6

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-

7

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

9

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

1C

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

11

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

12

“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-

13

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-

14

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

15

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

~~

16

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-

17

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

18

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-

E

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.

20

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-

21

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

22

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23

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

24

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

25

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

26

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 ”

28

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
OS Ss 0 Saene ies Cae Semen ie 0 putt le Gee

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
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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385009_0741%3A1. Public record. Not legal advice.