Petition for Writ of Certiorari — Balax, Inc. v. Bendix Corp.

Supreme Court brief1973

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IN THE

SUPREME COURT OF THE UN

October Term, 1972

No. 7271401

BALAX, INC. and JOHN M. VAN VLEET

Petitioners

MNT. ercesmeansctenenaber encase

THE BENDIX CORPORATION

and SELLEW CORPORATION

Respondents

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE SEVENTH CIRCUIT

EDWARD A. HAIGHT

JOHN W. HoFELpT

55 East Monroe Street

Chicago, Illinois 60603

MAXWELL H. HErriorr

THOMAS O. KLOEHN

780 North Water Street

Milwaukee, Wisconsin 53202

Counsel for Petitioners

HAMMERSMITH-BREITHAUPT PRINTING CORP., MILWAUKEE, WIS,

STN ee Pees

St kale ohhh Ae

Sars?

PP REEL RIO FS

REAM

INDEX

Page

RN cect cacassctecicunicasantenioventemsinasnatisien 1,2

DN sorsecseriecicrasccteaeraecsasteahintsicmonieenctioningicigene 2,3

I os cascacesieaemnceeounnabelaanecs 3,4

sc easadecaioreannblonens 4,5

Concise Statement of the Case ...................-.-c.c-ecse-ceaes 5-8

Reasons for Granting the Writ .................2..2....-:-200---- 8-30

I cricrss acceso ec aniaenn chdcaccoeabasnntes Gaimedanecealons 30

FE ORE GR NEI I OA SAE EEN 1-30

REC ean A ae a Res tials eerie ene Aue 31-48

I cal ai eas Goa nee hicks nansgeel eri 49-73

A Fee AT ae eatr enh ee BOALe Nr Aria Aaa CN EEE! 74-111

CITATIONS

Cases:

Automatic Radio Co., Inc. v. Hazeltine Research,

fac., 3399 US. S27 (1950) —.................. 12, 13, 16, 18

Bigelow, et al v. RKO Radio Pictures, Inc., et al

oo Bg 2 Re eer ens 28

Brown Shoe Co., Inc. v. United States, 370 U.S.

p< PRU ERINEE Uteaaie SRT ARE LERCH NA 23

Continental Ore Co., et al v. Union Carbide &

Carbon Corp., et al (1962) 370 U.S. 690 .......... 29

Fortner Enterprises, Inc. v. United States Steel

Corp., et al, 394 U.S. 495 (1969) uw. 17, 19

Klor’s Inc. v. Broadway-Hale Stores, Inc., et al,

ge eT 17, 20

iar Vo ng |

Page

Lear v. Adkins, 395 U.S. 653 (1969)....7, 8, 12, 13, 14,

15, 16, 17, 31

Northern Pacific Railway Co., et al v. United

States, 356 U.S. | SOD eee 17, 18

Pope Manufacturing Co. v. Gormully, 144 U.S.

RN ee ee *

United States v. DuPont & Company, 353 U.S.

586, 77 S. Ct. 872, 1 L. Ed. 2d 1057 i: ) 23

United States v. Glaxo Group Limited, et al

(1973), — U.S. —, 35 L. Ed. 2d 104... 13

United States v. Grinnell Corp., 384 U.S. 563, 86

S. Ct. 1698, 16 L. Ed. 24 778 23

United States v. Masonite Corporation, et al, 316

VS. M5 (M) 14, 17

United States v. Singer Manufacturing Co., 374

Oe 14

Zenith Radio Corp. v. Hazeltine Research, Inc.,

395 U.S. 100 (1969) 4, 23, 26, 27, 30

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1972

| No.

BALAX, INC. and JOHN M. VAN VLEET

Petitioners

Vv.

THE BENDIX CORPORATION

and SELLEW CORPORATION

Respondents

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE SEVENTH CIRCUIT

The petitioners, Balax, Inc. and John M. Van Vleet,

respectfully pray that a Writ of Certiorari issue to review

the judgment of the United States Court of Appeals for

the Seventh Circuit reversing the decision of the United

States District Court for the Eastern District of Wis-

consin.

OPINIONS BELOW

The judgment and opinion of the Seventh Circuit

Court of Appeals, review of which is sought, is officially

reported at 471 F. 2d 149 (7th Cir. 1972), and is re-

printed here as Appendix A together with the Order of

January 16, 1973, by the Seventh Circuit Court of Ap-

peals denying rehearing. The decision of the United

States District Court for the Eastern District of Wiscon-

sin dated January 8, 1971, reversed by that judgment and

decision, is officially reported at 321 F. Supp. 1095 (E.D.

Wis. 1971), and is reprinted here together with the un-

reported findings of Fact and Conclusions of Law filed

on February 10, 1971, as Appendix B. The first decision

in this case by the Court of Appeals which remanded it

to the District Court for reconsideration was entered on

January 30, 1970, and is officially reported at 421 F. 2d

809 (7th Cir. 1970), cert. den. 399 U.S. 911 (1970) and

reprinted here in Appendix C. The first decision and

opinion of the District Court in this case is officially re-

ported at 29] F. Supp. 328 (E.D. Wis. 1968) and is re-

printed here as Appendix D.

JURISDICTION

This action was initiated by respondents’ Complaint

alleging infringement of three United States patents cov-

ering swaging taps, and two counts of unfair competition,

giving rise to Federal jurisdiction under 28 USC 1338

and 1332. By their Amended Answers and Counter-

claims petitioners asserted among other defenses violation

of the antitrust laws. Federal jurisdiction of this antitrust

counterclaim exists under 28 USC 1337.

Respondents’ swaging tap patents have been held in-

valid and their other claims dismissed by a judgment

that is now final, 421 F. 2d 809 (9th Cir. 1970), cert.

denied, 399 U.S. 911. Also, all of petitioners’ counter-

claims have been finally dismissed, except the declaratory

judgment of invalidity of respondents’ patents, and the

antitrust claim presented here, i.e., particularly violation

of Section | and Section 2 of the Sherman Act and Sec-

tion 4 of the Clayton Act. Hence this Court's jurisdic-

oe One

tion invoked by this Petition for Certiorari is founded

upon 28 USC 2101 (c).

QUESTIONS PRESENTED

1. Do the rights to contract under state laws and to

license and bring suit for patent infringement under the

patent laws shield from the thrust of the anti-trust laws

industry regimenting activities which include:

a) contracts with certain competing, but non-produc-

ing manufacturers, requiring them to purchase all

their requirements of the product only from the

patent owner or his producing licensees and, as

part of the purchase contract, to acknowledge or

agree never to contest the validity of the seller’s

patents;

b) licenses to other competing manufacturers who

acknowledge or agree never to contest the validity

of the patents;

c) refusal to license and prosecution of a suit for

patent infringement to eliminate the sole remain-

ing effective competing manufacturer of the prod-

uct as part of an illegal combination.

d) settlement of infringement suits against other com-

peting manufacturers by consent decrees wherein

the validity of the patents are acknowledged and

by licenses which include acknowledgement of or

agreement never to contest the validity of the pat-

ents.

2. Does the Court of Appeals’ comparison of Benuix-

Besly’s’ actual sales with a nonexistent “potential” mar-

ket that is three times as large as the actual market support

the conclusion that Bendix-Besly lacked sufficient control

over “the part of trade or commerce among the several

1Bendix Corporation is the successor in interest of Besly-Welles, the

original patent owner, and is sometimes referred to as Bendix and some-

times as Bendix-Besly.

states” to “monopolize or attempt to monopolize or com-

bine or conspire * * * to monopolize” it in violation of

Section 2 of the Sherman Act?

3. In view of the facts that Bendix-Besly (a) held a

presumptive monopoly covering the entire swaging tap

market, (b) had entered into contracts binding enough

of its competitors never to challenge that monopoly so

that Bendix-Besly controlled access to 77% to 91% of the

market, and (c) refused to license Balax, is the unchal-

lenged and uncontradicted testimony of the president, the

vice president, and the sales manager of Balax that

Balax’s sales were only 50% to 60% of what those sales

would have been but for Bendix-Besly’s violations suf-

ficient evidence of injury under Zenith Radio Corp. v.

Hazeltine Research, Inc. (1969) 395 U.S. 100 to satisfy

the injury requirement of Section 4 of the Clayton Act

to create a private cause of action for antitrust violations?

STATUTES INVOLVED

“Every contract, combination in the form of trust or

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

merce among the several States, or with foreign nations,

is declared to be illegal: * * *. July 2, 1890, c. 647, §1,

26 Stat. 209; August 17, 1937, c. 690, Title VIII, 50 Stat.

693 July 7, 1955, c. 281, 69 Stat. 282.” (15 USCA §1)

“Every person who shail monopolize, or attempt to

monopolize, or combine or conspire with any other per-

son or persons, to monopolize any part of the trade or

commerce among the several States, or with foreign na-

tions shall be guilty of a misdemeanor, * * *. July 2,

1890, c. 647, §2, 26 Stat. 209; July 7, 1955, c. 281, 69

Stat. 282.” (15 USCA §2)

“Any person who shall be injured in his business or

property by reason of anything forbidden in the anti-

trust laws may sue therefor in any district court of the

United States in the district in which the defendant re-

sides or is found or has an agent, without respect to the

amount in controversy, and shall recover threefold the

damages by him sustained and the cost of suit, including

a reasonable attorney’s fee. October 15, 1914, c. 323,

§4, 38 Stat. 731.” (15 USCA §15)

CONCISE STATEMENT OF THE CASE

This suit was initiated by a complaint filed on June 17,

1964 (A. 21)? by the respondents charging the petitioners,

Balax, Inc. and John M. Van Vleet (hereafter “Balax’’)

with infringement of three of respondents’ swaging tap*

patents together with alleged acts of unfair competition.

Upon discovering that respondents had licensed manu-

facturers of 75% of the cutting taps sold and had secured

requirements purchase agreements from four other major

tap manufacturers, all of which agreements were con-

ditioned on covenants never to challenge the validity of

respondents’ patents, petitioners filed an amended An-

2The letter “A” refers to the printed appendix in the court below.

3Prior to 1950, all interior screw threads on the insides of holes

were formed by cutting taps, which are long cylindrical steel tools with

helical threads ground on their exterior surfaces and deep axial flutes

interrupting the threads to create cutting edges and channels through

which chips cut from the work piece are expelled. Swaging taps, all

of which were covered by one or more of the Bendix-Besly patents,

have no flutes and form threads, instead, by deforming and displacing

the material of the work piece when turned into the hole. Swaging taps

are not used in the more brittle materials, such as cast iron, most

carbon steels and the like, which constitute about half of the demand

for taps. Swaging taps are much more economical and have a much

longer life than cutting taps. (App. C, p. 51, 421 F.2d 809, 811)

Swaging taps and cutting taps cannot be used on the same work piece

because swaging taps require 2 larger hole than cutting taps can work in.

Ne ae

swer and Counterclaim on February 14, 1966 (A. 45)

charging, inter alia, that Bendix violated §§1 and 2 of

the Sherman Act and §4 of the Clayton Act. Petitioners

founded this counterclaim upon those agreements to-

gether with correspondence between respondents and their

competitors, respondents’ refusal to license petitioners (al-

though respondents did offer a license after this Amended

Counterclaim was filed) and communications with pe-

titioners and testimony of respondents’ executives.

Each of the three Bendix patents which Balax was

charged to infringe was held to be invalid. Two were

held to be invalid in the District Court because the

claimed inventions had been in public use by Bendix

more than a year before the respective applications for

patent (A. 36, App. D). The third patent was held to

be valid and infringed by the District Court (App. D)

but found by the Court of Appeals for the Seventh Cir-

cuit (App. C) to be completely anticipated by a 1939

German patent.

The Court of Appeals also affirmed the trial court’s

dismissal of the Bendix unfair competition counts but re-

versed the dismissal of the anti-trust counterclaim of

Balax alleging violation of sections 1 and 2 of the Sher-

man Act and Section 4 of the Clayton Act. As to the

latter, the Court of Appeals stated:

“* * **that part of the judgment dismissing defend-

ants’ antitrust counterclaim is vacated and set aside

and this cause is ordered remanded to the district

court for a reconsideration of such counterclaim

** *” (App. C, p. 73, 421 F. 2d at 821)

Upon the request of Bendix (A. 155), the District

Court allowed the record to be reopened and supple-

mented by evidence not available at the original trial

in 1968 and by rebuttal evidence of Balax (A. 157). Ben-

dix objected to precluding evidence that was available

at the 1968 trial, arguing that the 1969 decision in Lear

v. Adkins, 395 U.S. 653 (1969), had so changed the law

as to warrant a retrial. The District Court ruled:

“Bendix Corporation has not persuaded me that a

valid reason exists for so broadening the prospective

hearing.

“Although the court of appeals discussed the im-

pact of Lear v. Adkins, 395 U.S. 653 (1969), it is

my belief that Lear does not justify the broadened

hearing sought by Bendix Corporation.

“Lear relieved a licensee from any estoppel which

barred said licensee from challenging the licensors’

patent. In the case at bar, however, Balax, Inc. does

not rely upon the protection of the Lear decision for

the simple reason that it has never been a licensee.”

(A. 163-164)

Accordingly, at a hearing on November 9 and 10, 1970,

limited to the question of liability by consent of the

parties, evidence not available at the 1968 trial was en-

tered of record. On the thus augmented record, the Dis-

trict Court sustained the anti-trust counterclaim of Balax

(App. B). An interlocutory appeal pursuant to the pro-

visions of 28 U.S.C. 1292(b) was taken by Bendix from

the District Court’s decision on anti-trust liability.

The decision of the Court of Appeals, review of which

is sought here, reversed the District Court (App. A,

471 F. 2d 151). A basis for the reversal was “that Lear

should not be applied retroactively to this case in its dam-

age aspects” (App. A, p. 15; 471 F. 2d at 157-8). This,

despite the fact that petitioners have never relied upon

Lear and Lear is nowhere mentioned in either the de-

cision or the Findings of Fact and Conclusions of Law

of the District Court. Neverthelesss, the Court of Ap-

ee ERM AD

peals found that the District Court “apparently assumed

that Lear was relevant” (App. A, p. 10; 471 F. 2d 155).

The Court of Appeals also found, contrary to the find-

ings of the District Court, that Bendix lacked sufficient

market control to violate Section 2 of the Sherman Act

and that petitioners failed to prove that they had been

“injured” as required by Section 4 of the Clayton Act.

REASONS FOR GRANTING THE WRIT

A. The decision of the Seventh Circuit Court of Ap-

peals is predicated upon the erroneous premise that

covenants not to contest the validity of patents were,

prior to Lear, immunized from the anti-trust laws

regardless of the purpose for such covenants.

To arrive at the conclusion reached below, it is neces-

Sary to consider that prior to Lear the right to extract

covenants not to contest the validity of patents was un-

limited. Indeed, in the factual context of this Case, it is

necessary to consider that right as applicable not only

to patent licenses but also to mere contracts relating to

the purchase of patented products.

The employment by Bendix of this right to regiment

the industry and to exclude the competition of respondent

Balax is apparent from the fact findings of the District

Court (App. B).

By June of 1964, when this suit was commenced, Ben-

dix had licensed five of its competitors to manufacture

swaging taps under the Bendix patents; each agreeing

in its license not to contest the validity of the licensed

patents during the term of the license “and thereafter”

(Finding 12(b), App. B, p. 40).

By that date, Bendix also had written agreements with

five additional competitors. Under these agreements,

these competitors agreed to buy all their requirements

for swaging taps only from Bendix and its licensees and,

for an unlimited time, not to contest the validity of the

Bendix patents (Finding 12(b), App. B, pp. 40, 43).

Four of the five were also granted options to secure patent

licenses — and agreed never to contest the validity of the

Bendix patents during the life of the agreements and even

after termination of the agreements (Finding 12(b)).

That such covenants did not necessarily depend upon the

grant of any patent rights is apparent from the extraction

of a similar covenant from a mere jobber which had

purchased swaging taps from Bendix (Ex. A, I. 106).

At the hearing on reconsideration of the anti-trust

claim, it was determined that during and subsequent to

the original trial, Bendix had licensed and was selling

swaging taps to all its remaining competitors except re-

spondent Balax and one other whose sales were found

to be “not significant in amount”. (App. B, pp. 41-42)

By extracting covenants never to challenge the validity

of the Bendix patents from licensees and from purchasers

all of whom are tap manufacturers, Bendix effectively

silenced all parties who would have had the motivation

and the means to challenge the validity of Bendix’s pat-

ents. That Bendix had possession of the evidence of the

invalidity of its patents when it secured such agreements

and at least one legal opinion of their invalidity, adds

proof that the dominant purpose of these agreements was

to maintain control of the swaging tap market by exclud-

ing undesired competitors. The success of the scheme is

apparent from the fact that Bendix and its licensees sold

between 77% and 91% of all of the swaging taps sold in

the United States prior to 1970, the remainder being sold

by Balax. (App. A, p. 25; 471 F. 2d at 163)

aia bh oes ch ae co of

As Bendix-Besly held out to one prospective licensee

in 1958:

“As I pointed out to you, I hope not only for the

sake of Besly but for the sake of competitors whom

we know and respect that we have a valid patent,

one that will stand up to any legal test. If this proves

to be the case, we can hope that all those who operate

under the license will enjoy increased profits through

Promotion of taps made to this design.” (Ex. A, p.

272)*

To another prospective licensee, Pratt & Whitney,

Bendix-Besly in 1959 threatened that “* * * a legal en-

tanglement is highly expensive and drawn — >”

and volunteered advice as to how any future accusations

of collusion might be dealt with:

“Regarding accusations of collusion, if our own com-

pany were put in this position I most certainly think

that we would merely ask a competitor to take all

the evidence in our possession and let him foot the

bill for the legal proceeding. In this type of a situa-

tion we would merely point out the fact that we

did not feel that the evidence we had was strong

enough to support our position in dealing with legal

frailties, and we simply signed a license agreement

rather than engage in a legal controversy in which

the results were uncertain at best. I feel that think-

ing along a line such as this would substantiate any

agreement that the two firms might enter into.”

(Ex. A, p. 274)

Pratt & Whitney subsequently signed the requirement

purchase agreement covenanting never to challenge the

validity of Bendix’s patents notwithstanding the advice

of its patent attorney that “ * * * it is his considered opin-

ion that your [Bendix] reissue patent * * *” is invalid,

citing the German petty patent no. 1,455,626 registered

*“Ex. A” refers to Exhibits appendix in the court below.

on January 9, 1939 (Ex. A, II. 278) on the basis of which

Bendix’s reissue patent was ultimately declared invalid.

Bendix also sought to extend the term of its monopoly

via the patent license route. It sought a license under

Balax’s patent for an improved thread configuration on

a tap so that Bendix “ * * * could extend the life of the

X-Press tap in terms of our licensees already established.”

(A. 303) It did not desire any competition from Balax,

however. Balax was offered a license under the Bendix

patents, but only on the condition that the Balax tap

would be sold “ * * * at the higher price which their

superior performance justified and [Balax] would not

offer conventional X-Press [Bendix-Besly] tap.” (Ex. A,

I. 181) (A. 309) Bendix “ * * * of course, * * * did not

want” Balax to get into the tap business. (A. 304-305)

And, Bendix had to obtain the permission of its other

licensees to make its arrogant offer to Balax because

“* * * we [Bendix] had to explain to them that Van

Vleet’s [Balax’s] operation was a unique license, that we

did not regard this as a device for putting new competi-

tion into business on the X-Press [Bendix] tap; that the

reason why we were granting him the license was so that

he could go ahead and manufacture and sell taps under

the Besly [ Bendix] patent and, therefore, prove the value

of his machine.” (A. 310)

When Balax refused the restricted license and began

marketing its swaging taps, Bendix-Besly withdrew its

offer and “initiated this suit against Balax because the

“* * * ‘Balax’ Tap, made in a small shop near Milwau-

kee, poses more of a competitive threat in the market

***” (App. B, p. 45).

The Court of Appeals found that this case “* * * jn-

volves primarily the scope of the retroactive application

Spon rat ering SLATER Oe

of Lear, Inc. v. Adkins, 395 U.S. 653 (1969).” (App. A,

p. 1, 471 F.2d at 151) This conclusion was based upon

the Court’s declarations that:

(1) “In 1950 the Supreme Court held that ‘the gen-

eral rule’ was that a patent licensee operating

under a license agreement was estopped to deny

the validity of his licensors patent in a suit for

royalties. dutomatic Radio Manufacturing Co.

v. Hazeltine Research, Inc., 339 U.S. 827, 836.”

(App. A, p. 10, 471 F. 2d at 155)

(2) “All of the licensee restrictions imposed by the

plaintiff (Bendix) occurred subsequent to 1950.”

Ibid.

(3) “The plaintiff commenced its infringement suit

in 1964.” Ibid.

(4) “The District Court’s judgment was rendered

in 1968.” Ibid.

(5) “On June 16, 1969 the Supreme Court decided

Lear, Inc. v. Adkins, 395 U.S. 653 holding that

a licensee is not estopped to enterpose the valid-

ity of the licensed patent as a defense to an action

by the patentee-licensor or to enforce the license

agreement. The Court expressly overruled its

1950 holding to contrary.” Ibid.

(6) “The District Courts apparently assumed that

Lear was relevant and that the license restric-

tions constituted per se antitrust violations in

light of Lear.” Ibid.

After an analysis of the criteria for retroactive appli-

cation of precedents, the Court of Appeals held, “We

conclude, therefore, that Lear should not be applied

retroactively to this case in its damage aspects. Conse-

quently, the portion of plaintiff's [ Bendix’s] license agree-

ments providing that the licensee ‘will not contest the

validity of any patent which is now a part of this agree-

ment during the life of this agreement’ did not constitute

a misuse of the patent.” (App. A, p. 15, 471 F.2d at

158)

However, the decision of this court controlling the

facts of this case was not Automatic Radio Co. v. Hazel-

tine, supra, but rather the decision in Pope Manufactur-

ing Company v. Gormully, 144 U.S. 224 (1892). The

Automatic Radio case, like the Lear decision which over-

ruled it, dealt with an estoppel implied by state law. By

contrast, the Pope v. Gormully case like the present case

deals with expressed covenants prohibiting licensees from

challenging the validity of patents, as to which the Lear

decision changed nothing, as this Court recently held in

United States v. Glaxo Group Limited et al (1973),

— U.S. —, 35 L. Ed. 2d 104, at 110:

“** * in the tradition of Pope Mfg. Co. v. Gormully,

144 U.S. 224, 234, 36 L.Ed. 414, 12 S.Ct. 632

(1892): ‘It is as important to the public that com-

petition should not be repressed by worthless patents,

or that the patentee of a really valuable invention

should be protected in his monopoly .. .,’ a view

most recently echoed in Lear v. Adkins, 395 U.S.

653, 670, 23 L. Ed. 2d 610, 895 S. Ct. 1902 (1969).”

[Italics added ]

This Court held in Pope v. Gormully, supra, that a

covenant not to challenge the validity of the patent is a

creature of contract law, and not a part of the monopoly

granted under the patent laws, and hence a convenant

not to challenge the validity of licensed patents is not

immune from the laws voiding illegal agreements and

agreements against public policy or in restraint of trade.

144 U.S. at 223. The Automatic Radio Company case

did not create such immunization, nor did the Lear de-

cision change that law. Ironically, the effect of the effort

ae a

ETS INGEN Oe ERI IRR a 8 OF

of the Court of Appeals to prevent retroactive applica-

tion of Lear was to apply Lear retroactively to legitimize

a contract and combination that was illegal before Lear.

In United States v. Singer Manufacturing Company,

374 U.S. 174 (1963), Singer and two European manu-

facturers of sewing machines entered into a series of cross

licenses of patents covering cam operated zigzag mecha-

nisms for sewing machines, for the dominant purpose of

destroying the competition of Japanese sales of the in-

fringing machines in the United States. This Court, citing

United States v. Masonite, 316 U.S. 265 (1942), held,

“* * * it ‘is equally well settled that the Possession of a

valid patent or patents does not give the patentee any

exemption from the provisions of the Sherman Act be-

yond the limits of the patent monopoly.” 374 U.S. at 196.

The Singer case, like the present case, involved a series

of license agreements that appeared individually to be

innocuous, but Singer and its conspirators used these

agreements to combine their patents in a way that gave

them more market leverage than the individual patents

alone could have provided to effectuate an illegal dom-

inant purpose. In Singer the dominant purpose was to

eliminate Japanese competition. In the present case the

dominant purpose was to eliminate competition from all

but those “competitors whom we know and respect”

(Ex. A, I. 272). In Singer they combined valid patents.

In this case, Bendix-Besly combined with its friendly

competitors to confer patentability and hence monopoly

on an unpatentable product. Such contracts, combinations

and conspiracies are not now and never have been beyond

the operation of the general laws, including the anti-

trust laws. The decision of the Court of Appeals, apply-

ing Lear retroactively to legitimize such contracts, com-

binations and conspiracies is no less erroneous than a

retroactive application of Lear to create an antitrust vio-

lation.

While, prior to Lear, the right to license under the

patent laws might have afforded basis for the legitimate

inclusion in patent licenses of covenants not to contest

the validity of patents, no such justification existed for

such covenants in ordinary contracts of purchase even

of patented products.

Requirements contracts containing the covenant were

entered into by Bendix with four major competing tap

manufacturers. (A. 104, 107, 109, 119). A fifth such

covenant was extracted from a mere jobber as considera-

tion for the sale to him of Bendix swaging taps (A. 106).

The economic leverage of these agreements pivots on

the industry wide practice of using only exclusive dis-

tributors; that is, distributors that sell only the products

of a single manufacturer. (A. 567) The crucial impor-

tance of these agreements to Bendix emerges from the

fact that when these manufacturers were induced to sign

these agreements, Bendix knew of its own prior use of two

of its alleged inventions and the prior art upon which its

third patent was finally declared invalid in this action —

and had received the opinion of at least one patent at-

torney that its patents were in fact invalid. (Ex. A. 273)

After they entered into these agreements, the competing

manufacturers had no choice but to purchase their en-

tire requirements solely from Bendix or its licensees.

Should they attempt to purchase taps from another source

or to enter upon the manufacture of them for sale to

their distributor without paying tribute to Bendix-Besly,

they faced, in addition to a suit on the contract itself, the

threat of an infringement suit which they could not win

= a |

and Bendix could not lose, They had no infringement

defense; all known swaging taps infringed the Bendix

patents. And, by the contracts, they had bargained away

the right to contest the validity of the Bendix de facto

invalid patents.

Other swaging tap manufacturers, such as Balax, could

not sell swaging taps directly to the distributors of those

competitors since all of the distributors are bound to

handle only one manufacturer’s products. These manu-

facturers who entered into requirements purchase agree-

ments together with Bendix and its licensees sell in

excess of 80% of all of the taps sold and hence their dis-

tributors represent the only access to over 80% of the

market and these are effectively foreclosed to any and

all manufacturers of swaging taps except Bendix-Besly

and its licensees.

While the Court of Appeals held that these require-

ments purchase contracts and the jobber contract were

“purchase licenses”, and therefore the covenants were

immune from the antitrust laws prior to this Court’s de-

cision in Lear v. Adkins, supra, the purchase agreements

alone do not grant any rights to or under the Bendix

patents.

Involved here are simple buy and sell contracts which

the seller conditioned upon the buyers’ agreements to

waive the statutory defenses granted to the buyer in the

event that the seller should charge the buyer with in-

fringement of the seller’s patents; and nothing decided in

Lear v. Adkins, supra, could affect these purchase agree-

ments.

The precedents governing these requirements purchase

agreements include neither the Automatic Radio case,

nor the Lear case, but instead are found in this Court’s

decisions in United States v. Masonite Corporation, et al.,

316 U.S. 265 (1942); Northern Pacific Railway Co., et

al. v. United States, 356 U.S. 1 (1958); Klor’s Inc. v.

Broadway-Hale Stores, Inc., et al., 359 U.S. 207 (1959) ;

Fortner Enterprises Inc. v. United States Steel Corp.,

et al., 394 U.S. 495 (1969).

In the Masonite case, supra, Masonite held patents on

high density hardboard made from wood chips (316

U.S. at. 268) and Masonite entered into agency agree-

ments with competing manufacturers of building ma-

terials (316 U.S. at 269-270) making those competitors

del credere factors of Masonite to sell Masonite’s pat-

ented hardboard at prices dictated by Masonite (316

U.S. at 271-272). Masonite’s competitors, similarly to

the Bendix-Besly’s competitors, expressly acknowledged

the validity of Masonite’s patents (316 U.S. at 271) for

the term of the agreement which was the life of the last

patent to issue (316 U.S. at 273). Masonite, like Bendix-

Besly, gave its contracting competitors an option to take

a license (316 U.S. at 272). In both cases, the competi-

tors all knew that the others had signed similar agree-

ments. The Masonite case differs from this case in that

(1) the dominant purpose of the Masonite agreements

was to fix prices,” whereas the dominant purpose of the

Bendix-Besly purchase agreements was to exclude com-

petition, and (2) Masonite’s competitors became del

ELLE EIN LI LECTED EE ty

credere factors and Bendix-Besly’s were simple require- —

ments purchasers. This Court held that Masonite vio-

lated Section 1 of the Sherman Act, on the basis that:

“The owner of a patent cannot extend his statutory

grant by contract or agreement. A patent affords no

5Bendix-Besly and its licensees and purchasing competitors main-

tained price uniformity (App. B, pp. 33-34, 45, 471 F.2d 160) but

the Court of Appeals held that Balax was not hurt by the practice,

(Ibid.).

immunity for a monopoly not fairly or plainly with-

in the grant. * * * ‘[public policy] equally forbids

the use of the patent to secure an exclusive right or

limited monopoly not granted by the Patent Office

and which is contrary to public policy to grant.’ Be-

yond the limited monopoly which is granted, the

arrangements by which the patent is utilized are sub-

ject to the general law.” 316 U.S. at 277.

“But where he [a patentee] utilizes the sales orga-

nization of another business — a business with which

he has no intimate relationship — quite different

problems are posed since such a regimentation of a

marketing system is peculiarly susceptible to the

restraints of trade which the Sherman .Act condemns.”

316 U.S. at 279.

As Justice Douglas observed in his dissenting opinion

in Automatic Radio Co., Inc. v. Hazeltine Research, Inc.,

339 U.S. 827 at 839 (1950), “But what worse enlarge-

ment of monopoly is there than the attachment of a patent

to an unpatentable article? When we consider the con-

stitutional standard, what greater public harm than that

is there in the patent system?”

Just as Bendix here conditioned the sale of its swaging

taps upon the agreement of the purchasers not to chal-

lenge the presumptive monopolies Bendix had obtained

covering swaging taps, so in Northern Pacific Railway

Co. et al. v. United States, 356 U.S. 1 (1957), the North-

ern Pacific Railroad Company conditioned the sale or

lease of its land upon the covenant by the grantee or

leasee to ship over Northern Pacific Railroad Company

all commodities produced or manufactured on the land,

provided the rates or services of the Northern Pacific

Railroad were equal to those competing carriers. There

this Court defined a tying arrangement:

‘“* * * as an agreement by a party to sell one product

but only on the condition that the buyer also pur-

chases a different (or tied) product, or at least agrees

that he will not purchase that product from another

supplier. * * * Indeed ‘tying agreements serve hard-

ly any purpose beyond the suppression of competi-

tion.’ * * * They are unreasonable in and of them-

selves whenever a party has sufficient economic pow-

er with respect to the tying product to appreciably

restrain free competition in the market for the tied

product and ‘not insubstantial’ amount of interstate

commerce is affected.” 356 U.S. at 5-6.

Here a more subtle, but nevertheless effective tie-in

arrangement exists in the form of the requirements pur-

chase contracts. The purchasers under those contracts

were of necessity agreeing not to purchase swaging taps

from other sources during the life of Bendix-Besly’s

patents as a condition to the right to purchase such taps

from Bendix-Besly. The contracts precluded them from

purchases from any other source even had they been

willing to face expensive patent litigation by so doing.

As the record discloses, all known swaging taps on the

market infringe one or more of the Bendix-Besly patents.

Thus, when the purchasers bargained away their defense

of invalidity of Bendix-Besly’s patents, they bargained

away their only defense to an injunction against selling

taps from any other source during the life of Bendix-

Besly’s patents.

Since this violation is based upon Section | of the

Sherman Act, monopoly power in Bendix-Besly is not a

necessary element. Regardless of the market definition

adopted, Bendix-Besly holds sufficient economic power

in its patents that cover all known swaging taps, for as

this Court held in Fortner Enterprises Inc. v. United

States Steel Corp. et al., 394 U.S. 495 at 502-503 (1969) :

“The standard of ‘sufficient economic power’ does

not, as the District Court held, require that the

27m

defendant have a monopoly or even a dominant Pposi-

tion throughout the market for the tying product.

Our tie-in cases have made unmistakably clear that

the economic power over the tying product can be

sufficient even though the power falls far short of

dominance and even though the power exists only

with respect to some of the buyers in the market.”

It is true that Balax, a small infant corporation with

only one product, swaging taps, is insignificant in the

cutting tool industry and that the elimination of Balax

would not have affected the economy, but those facts

do not deprive Balax of the protection of the antitrust

laws, for as this Court held in Klor’s, Inc. v. Broadway-

Hale Stores, Inc., et al., 359 U.S. 207 at 213-214 (1959):

“It [the boycott] interferes with the natural flow of

interstate commerce. It clearly has, by its ‘nature’

and ‘character,’ a ‘monopolistic tendency.’ As such

it is not to be tolerated merely because the victim is

just one merchant whose business is so small that his

destruction makes little difference to the economy.

Monopoly can as surely thrive by the elimination

of such small businessmen, one at a time, as it can

by driving them out in large groups. In recognition

of this fact the Sherman Act has consistently been

read to forbid all contracts and combinations ‘which’

tend to create a monopoly,’ whether ‘the tendency is

a creeping one’ or ‘one that proceeds at full gallop.’”

B. The definition of “* * * any part of the trade or

commerce among the several States, * * * in §2 of

the Sherman Act to include estimated sales that may

be made in the future creates a loophole in Section 2

through which monopolists will escape the Sher-

man Act for want of sufficient market dominence.

In determining that “* * * the question of potential

monopoly power [by Bendix] is exceedingly delicately

ere : \ eae ala Se ES TL TE TD

balanced on several fine lines * * *”, the Court of Ap-

peals adopted the hypothesis “ * * * that 50% of the $60

million per year tap market is potentially interchange-

able between cutting and swaging taps and that after an

actual interchange of the $30 million market would de-

crease to $6 million by virtue of the relative inexpensive-

ness of the total volume of needed swaging taps, * * *”

and concluded that “ * * * the combined market position

of plaintiff [ Bendix] and its licensee is 31.2%.” [empha-

sis added ] (App. A, pp. 22, 23,471 F.2d at 161) However,

the Court of Appeals also found that in actual sales, in

1970 Bendix and its licensees had 74% of the market,

in 1969 77%, in 1968 80%, in 1967 83%, in 1966 85%,

in 1965 89% and 91% in 1964, the year this action was

filed. (App. A, p. 25, 471 F. 2d at 163)

Thus in determining market control under §2 of the

Sherman Act in this case, the Court of Appeals compared

actual sales with a potential market that it estimated

would exist at some undetermined time in the future—

approximately three times as large as the actual market

measured in sales actually made. Further, following the

potential market theory of the Court of Appeals, Bendix-

Besly and its licensees would have had but one-third of

the “potential” market had they captured 100% of the

actual swaging taps sales by driving Balax out of the

market place. (Bendix-Besly nearly achieved that 100%.

for Balax was the only competing manufacturer that sold

any significant amount of swaging taps from the time this

action was brought in June of 1964 until this Court de-

nied Bendix-Besly’s petition for certiorari in June 1970.)

Hence, notwithstanding the fact that Bendix-Besly and

its licensees would have been the only sellers in the mar-

ket, their “potential monopoly power” would have been

“exceedingly delicately balanced on several fine lines”

according to the decision below. (App. A, p. 24, 471 F.

2d at 163)

In short, any monopolist in a growing market can

avoid Section 2 of the Sherman Act in the Seventh Cir-

cuit by showing the Court of Appeals that the market

at some future date might be more than three times the

present actual sales.

Although the Court of Appeals seemed to accept the

swaging tap market as the relevant market, it also criti-

cized the trial court’s findings on that issue stating, “This

market definition ignored the evidence in the record of

interchangeability among Swaging and cutting taps.”

(App. A, p. 21, 471 F.2d at 161) The Court of Ap-

peals also relied upon what it characterized as “the de-

fendant’s [ Balax’s] own admissions that swaging taps are

‘reasonably interchangeable’ with approximately 50% of

the cutting tap market.” However, there is no such evi-

dence and certainly Balax made no such admissions. What

all of the evidence proves and Balax argued is that swag-

ing taps are “superseding” cutting taps; that is, driving

cutting taps out of the market (A. 482-483, 533-535, 578-

580, 665-666), in the same way that diesel-electric engines

superseded steam engines on the railroads, and jet engines

superseded reciprocating propeller engines in commercial

planes.

Swaging taps have no more competition from cutting

taps than diesel-electric and jet engines have from their

outmoded predecessors. Indeed, the record shows that

the sales of swaging taps were serenely unaffected when

the price of cutting taps was cut in half (A. 578-580,

665-666). Hence, to the extent that the Court of Appeals

was influenced by what it thought to be “interchange-

ability”, it was misled.

The market involved here is the swaging tap market,

which is a submarket of the internal threading tool mar-

ket. Brown Shoe Co., Inc. v. United States, 370 U.S. 294

at 325 (1962) ; United States v. DuPont & Co., 353 U.S

586 at 593-594, 77 S. Ct. 872, 1 L. Ed. 2d 1057 (1957) ;

United States v. Grinnell Corp., 384 U.S. 563, 572-573,

86 S. Ct. 1698, 16 L. Ed. 2d 778, 787-788. Moreover,

with control of 77% to 91% of that submarket during

the years involved, there can be little room for doubt

that Bendix-Besly and its licensees had monopoly control.

Cf. United States v. Grinnell Corp., supra, 384 U.S. at

571, 16 L. Ed. 2d at 786. .

C. The decision of the Court of Appeals holding that

Balax failed to prove the injury required by §4 of

the Clayton Act directly conflicts with this court’s

decision in Zenith Radio Corp. v. Hazeltine Re-

search, Inc. et al, 395 U.S. 100 (1969) and effectively

denies the remedies of the antitrust laws to newly

formed manufacturing businesses.

Balax, Inc. was formed by petitioner John M. Van

Vleet in November of 1959 for the purpose of exploiting

Mr. Van Vleet’s inventions relating to an improved tap

thread design and to a new tap thread grinding machine

that automatically grinds threads with the corrected con-

figuration. Balax, Inc. went into commercial production

for the first time in 1962 having as its only product swag-

ing taps and employing the Van Vleet inventions. The

tap with the improved thread may be described as an

axially balanced or “Balax” tap. (App. B, p. 36, Ex. A, I.

144)

As soon as Balax, Inc. began marketing its taps, Bendix-

Besly responded by charging Balax with infringement of

its patents and caused Balax’s supplier of plastic pack-

erie» hs

SS en cs

ages for its taps to breach its contract with Balax by

threatening the supplier. In the two-year interval be-

tween the infringement charge and the beginning of this

suit Bendix-Besly signed up another major tap manu-

facturer, Jarvis (Ex. A 32-42) as a licensee and, immedi-

ately before filing this action, finally succeeded in obtain-

ing a covenant never to challenge the validity of Bendix-

Besly patents from Pratt & Whitney (Ex. A, II. 199-200)

— which possessed evidence of the invalidity of Bendix-

Besly’s patents and an opinion of its attorney that the

Bendix-Besly patents were invalid. (Ex. A, I. 273)

The filing of this action was well known in the market

place where potential customers for resale and users

could contemplate potential liability to Bendix-Besly

should Bendix prevail in this action. (A. 537-538) Balax,

Inc. survived and continued to market its swaging tap

with increasing sales each year, notwithstanding all of

Bendix-Besly’s efforts to suppress Balax’s business, includ-

ing the massive burden on the limited assets of the infant

Balax as well as the diversion of a substantial portion of

its management and engineering energies required for

the defense of the patent action (A. 514-516, 525-527).

Indeed, Balax, Inc. was the only significant competition

to Bendix-Besly and its licensees in the swaging tap mar-

ket. Balax accomplished this feat by selling its swaging

taps to five manufacturers of cutting taps who resold the

swaging taps through their distributors along with their

cutting taps (A. 482), and by obtaining thirty-five dis-

tributors (A. 670) — compared to Bendix-Besly’s five

hundred (A. 573) — who sold a small portion of Balax’s

production directly to users.

The activities and contracts of Bendix-Besly closed all

other avenues of growth to Balax. At the trial in Jan-

uary of 1968 the president of Balax, John Van Vleet,

testified that Balax midwest sales were approximately

60% of what they would have been but for Bendix’s ac-

tivities in attempting to enforce patents against Balax

and its other harassments of Balax (A. 511). Also at

the trial in 1968, Balax’s sales manager testified that in

his judgment sales by Balax were at the national level

only 50% of what they would have been but for those

activities of Bendix. (A. 537) Balax’s vice-president also

testified that the diversion of assets and executive energies

occasioned by this law suit prevented Balax from broad-

ening its product line and from acquiring the necessary

capital equipment to operate as efficiently as it could

operate. (A. 525-528) At the hearing upon reconsidera-

tion on November 9th and 10th, 1970, as to injury to

counterclaim plaintiff, the vice-president of Balax tes-

tified further as to the limitations imposed upon effi-

ciency and productivity by the inability of Balax to ob-

tain financing which was a direct result of this action

(A. 626-640, 656). The vice-president of the only finan-

cial institution that would provide any financial aid to

Balax, testified that his bank could not provide a letter

of credit to Balax to secure the cost bond for the first

appeal in this case without the personal guarantee of

stockholders and directors of Balax together with a se-

curity agreement covering all of Balax’s assets and re-

ceivables. (A. 618-620) Hence Balax could not broaden

its product line, to include cutting taps. Without a com-

plete line including cutting taps, Balax could not obtain

adequate distribution since tap manufacturers use exclu-

sive distributors who handle but one manufacturer’s prod-

uct line and distributors want a complete line to sell (A.

537, 567). And Balax was foreclosed from selling swaging

taps to the tap manufacturers who account for between

80% and 90% of the cutting taps sold in the United

States. They had signed contracts containing covenants

never to challenge the validity of the Bendix-Besly in-

valid patents relating to swaging taps.

Nevertheless, the Court of Appeals, reversing the Dis-

trict Court, noted that Balax’s business, instead of failing,

““* * * has steadily increased and would increase more if

it carried cutting taps, * * *” and held “* * * that defen-

dants [ Balax and Van Vleet] did not prove any recover-

able damages, and that assuming or speculating that dam-

ages were incurred by defendants, they failed to prove

that such damages were the proximate result of plaintiff's

actions.” Let it be emphasized here that the issue of the

quantum of damages has not yet been tried, it having

been set aside by stipulation for separate trial, and

that this Bendix appeal was taken only under 28 USC

1292(b) from the District Court’s finding of liability in

Bendix-Besly.

The foregoing facts and evidence are governed by this

Court’s decision in Zenith Radio Corp. v. Hazeltine Re-

search, Inc., et al., 395 U.S. 100 (1969). Hazeltine sued

Zenith for infringement of patents in a pool, called

“CRPL” controlled by Hazeltine and others. CRPL

would package license its patents only to parties manu-

facturing in Canada, and Zenith sought to manufacture

in the United States for export to Canada. Hence, Zenith

was denied a license by the pool. Nevertheless Zenith at-

tempted to export to Canada and encountered harassing

and intimidating activities by CRPL culminating in

Hazeltine’s infringement action, for the defense of which

Zenith was awarded three times its attorneys fees and

costs as antitrust damages.

Zenith produced its president and one of its vice-

presidents both of whom testified that but for the ac-

a » ‘ chiiehaiiaheatiaaminiaal tetinitetaniaiian aes

tivities of the pool Zenith would have had 16% of the

radio and television market in Canada and instead had

only 3 to 5%. Zenith also produced one of its accountants

who, based upon the testimony of the president and vice-

president, arithmetically calculated the dollar value of

what Zenith’s Canadian market could have been and

hence of Zenith’s dollar value loss. The testimony of Ze-

nith’s president and vice-president was premised on the

fact that Zenith had 16% of the U.S. market. (395 U.S.

at 116)

The evidence of the injury offered by Zenith in that

case and Balax in this case is identical, except in three

circumstances. First, Balax, unlike Zenith, did not have

an established business when the Bendix antitrust activ-

ities began. Instead Balax from its very commercial in-

ception, from the sale of its first products, encountered

the conspiracy and combination in restraint of trade and

attempts to monopolize carried out by Bendix-Besly.

Therefore Balax has no bench mark of free competitive

sales in any market to rely upon. Rather it is forced to

base its estimates upon the distribution network it might

have had, but for Bendix-Besly’s activities, as compared

with the success that Balax enjoyed where it was able to ob-

tain distributors or access to distributors. Secondly, unlike

in Zenith the Balax witnesses were not cross-examined,

the Balax testimony was not rebutted and has not been

challenged in any respect by Bendix-Besly in the course

of this litigation. Third, Zenith placed one of its account-

ants on the stand to carry out the arithmetical calcula-

tion from the evidence given by its president and vice-

president. Balax simply made a record of the essential

facts as to Balax’s actual sales together with the above

mentioned percentage of the portion of the market from

which it was excluded. However the arithmetic opera-

tions used to calculate the dollar sales loss as a result of

the exclusion are elementary and subject to judicial

notice. Moreover, at this stage in the proceedings, the

damage issue being set aside for separate trial, the pre-

cise quantum of damages is not even involved.

The only need for proving damage at this point is to

prove the existence of an injury that is not de minimus

as required by Section 4 of the Clayton Act. Balax per-

force adopted a more conservative measure of damages

than Zenith because Balax has not had the opportunity

to compete in a free market. Hence Balax claims only

those sales it has demonstrated its ability to obtain in the

market restrained by Bendix and its licensees.

If Balax’s evidence is imprecise, the cause of the im-

precision, therefore, lies not with Balax, but with the

activities of Bendix-Besly. As this Court stated in revers-

ing the Seventh Circuit Court of Appeals in Bigelow, et

al. v. RKO Radio Pictures, Inc., et al. (1946), 327 U.S.

251 at 265, “The most elementary conceptions of justice

and public policy require that the wrongdoer shall bear

the risk of the uncertainty which his own wrong has

created.”

In this connection the statement of the Court of Appeals

that Balax’s “* * * share of the swaging tap market in-

creased at * * * the expense of Besly’s * * *” (App. A, p. 25)

deserves analysis. In every year, but two, for which com-

plete annual sales figures are of record, i.e., 1957 through

1969, Bendix-Besly’s sales steadily increased. (Ex. A, 120,

264, 265) The sales of the licensees fluctuated more, but

also showed a steady growth curve. (A. 121, 265) Balax’s

sales grew at a faster rate than those of Bendix-Besly

and its licensees during the same years, but Balax’s total

sales were much much smaller and hence could show a

greater percentage rate of growth with lesser absolute

increases. Even more significant is the fact that the

parties were operating in a market which had a potential

of three or more times the total actual sales, and the

market area that Balax was able to penetrate had not

yet been exploited by Bendix-Besly. The market of sig-

nificance here was that from which Balax was excluded

by the predatory practices of Bendix-Besly.

Finally, the Court of Appeals found lack of causal

connection between Balax’s injury and Bendix-Besly’s

antitrust violation by dissecting and compartmentalizing

Bendix-Besly’s wrongful acts. First the Court of Appeals

artificially bissected the terms of Bendix-Besly’s cove-

nants shielding its patents from challenge into the por-

tions extending for lives of the contracts, which it de-

clared to be immune from the antitrust laws, and the

portions surviving termination of the contracts. (App. A,

p. 15) The latter, that Court declared, could have been a

misuse (App. A, p. 16, 471 F. 2d 158-159), but found no

specific damage evidence causally connected only to the

covenant terms that would outlive the contracts (App. A,

pp. 17, 20, 471 F. 2d 159-160). This Court prohibited

such techniques in Continental Ore Co., et al v. Union

Carbide & Carbon Corp., et al (1962) 370 U.S. 690 at

698-699 : “In cases such as this, plaintiffs should be given

full benefit of their proof without tightly compartmental-

izing the various factual components and wiping the slate

clean after scrutiny of each.”

The trial court found sufficient injury to Balax result-

ing from Bendix-Besly’s anti-trust violations, including

the bringing of this suit, to satisfy Section 4 of the Clayton

Act. The Court of Appeals overriding judgment — “as

it had to be if its no-injury rationale were to meet claims

RAY ESSN TC ve

of damage” — was that Balax would have done no more

business if Bendix-Besly had not contractually imposed a

patent monopoly covering the entire market upon the

unpatentable swaging tap. The Court of Appeals was

clearly in error. Cf. Zenith Radio Corp. v. Hazeltine

Research, Inc., et al (1969) 395 U.S. 100 at 118.

CONCLUSION

Because the Court of Appeals has approved a unique

misuse of the patent system, has created an important

new precedent defining relevant market for antitrust pur-

poses in a manner such that it can rarely be dominated,

has improperly applied this Court’s decision in the im-

portant Lear case retroactively to legitimatize previously

illegal contracts and combinations, and has disobeyed

this Court’s instructions most recently expressed in the

Zenith case regarding proof of injury in Section 4 of

the Clayton Act, petitioners urge the Court to grant this

Petition for Certiorari.

Respectfully submitted,

EDWARD A. HAIGHT

JOHN W. HoFeE.pt

MAXWELL H. HEerriorr

THOMAS O. KLOEHN

Counsel for Petitioners

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APPENDIX A.

The BENDIX CORPORATION and Sellew

Corporation, Plaintiffs-Appellants,

Vv.

BALAX, INC. and John M. Van Vleet,

Defendants-Appellees.

No. 71-1483.

United States Court of Appeals,

Seventh Circuit.

Argued Sept. 12, 1972.

Nov. 29, 1972.

* * *

Before HASTINGS, Senior Circuit Judge, and CUM-

MINGS and SPRECHER, Circuit Judges.

SPRECHER, Circuit Judge.

This appeal involves primarily the scope of the retro-

active application of Lear, Inc. v. Adkins, 395 U.S. 653,

89 S.Ct. 1886, 23 L. Ed. 2d 610 (1969).

This suit was commenced on June 17, 1964, seeking

to enjoin, and for an accounting of profits and damages

resulting from, defendants’ alleged infringement of three

patents owned by the plaintiff relating to a fluteless swag-

ing tap.

Before trial, plaintiff withdrew its patent No. 2,991,491,

admitting its invalidity due to plaintiff's own prior public

use. The trial court held plaintiff’s patent Re. 24,572

valid and infringed and patent No. 3,050,755 infringed

but invalid for prior public use by plaintiff. It dismissed

defendant's antitrust counterclaim. Besly-Welles Corp.

v. Balax, Inc., 291 F. Supp. 328 (E.D. Wis. 1968).

Upon appeal, this Court affirmed the judgment of

invalidity of No. 3,050,755 and reversed the judgment

of the validity of Re. 24,572. Bendix Corp. v. Balax,

Inc., 421 F.2d 809 (7th Cir.), cert. denied, 399 U.S.

911, 90 S. Ct. 2203, 26 L. Ed. 2d 562 (1970) 2

?“A tap is a tool used to form threads on the cylindrical inner sur-

face of a hole. A swaging tap forms threads by deforming the metal

and displacing it into the form of the desired thread. A swaging tap,

which forms no chips, is to be distinguished from a cutting tap which

forms threads by cutting away the metal with cutting teeth. The swag-

ing method is said to be more economical and easier to perform than the

cutting method. Swaging taps have a longer life than cutting taps.

They produce no metal chips. The costly and time consuming inspection

and cleaning of the work after the job is completed is thus eliminated.”

Bendix Corp. v. Balax, Inc., 421 F. 2d 809, 811 (7th Cir.), cert. denied,

399 U.S. 911, 90 S.Ct. 2203, 26 L. Ed. 2d 562 (1970). In order

to produce a cutting tap, a fluted blank is needed on which to grind

the threads. The machine needed to produce the fluted blank is rela-

tively expensive. Swaging taps have no flutes (or parallel grooves) so

that fluted blanks are not needed. Thus the maker of swaging taps

needs only a thread grinding machine and not an expensive flute grind-

ing machine.

? Suit was originally brought by Besly-Welles Corporation, an Illinois

corporation, whose name was later changed to Sellew Corporation.

In 1965, Besly-Welles Corporation, a Delaware corporation, was in-

corporated as a wholly-owned subsidiary of the Bendix Corporation.

The subject patents were transferred from the Illinois corporation to

the Delaware corporation and the Bendix Corporation was substituted

as a party in this case.

| as en

The Court vacated that part of the judgment dismissing

defendants’ antitrust counterclaim in order to consider

“the relevance, if any, of Lear.”*

Upon remand, the district court concluded that the

defendants had established their counterclaim and were

entitled to judgment. The district court considered that

this court’s statement that “the right to estop licensees

from challenging a patent is not part of the ‘limited pro-

tection’ afforded by the patent monopoly,” constituted

the law of the case. Then, inasmuch as many of plain-

tiff’s license agreements contained “a concession by the

$This Court said at 421 F.2d 820, 821:

“While it is true that a valid patent does afford some ‘limited pro-

tection,’ including ‘the right to license others to manufacture the patent-

ed tap,’ this is no answer to the thrust of defendants’ contention that

the licensor may not thereby forever preclude the licensee from chal- —

lenging the validity of the patent. By requiring such a condition in —

the license or sales agreement, plaintiff may have placed itself in the

position of unlawfully exceeding the protected area.

“Further, subsequent to the judgment of the district court under con-

sideration here, the Supreme Court in Lear, Inc. v. Adkins, 395 U.S.

653 (June 16, 1969), at 668-671, 89 S.Ct. 1902, 23 L. Ed. 2d 610

overruled the holding of Automatic Radio Manufacturing Co., Inc. v.

Hazeltine Research, Inc., 339 U.S. 827, 836, 70 S. Cr. 894, 94 L. Ed.

1312 (1950), insofar as it invoked a legally implied estoppel to deny

a licensee the right to challenge the validity of his licensor’s patent in a

suit for the collection of royalties.

* _ *

“From all this we can only conclude that the right to estop licensees

from challenging a patent is not part of the ‘limited protection’ afforded

by the patent monopoly. Furthermore, the reason is that it creates a

danger of unwarranted monopolization. Such danger may be even

greater here than in the usual licensee-estoppel case for the reason that

in the instant case the licensor sought to create an irrevocable estoppel,

not one merely extending during the life of the licenses and sales

agreements.

“The parties did not address themselves to the relevance, if any, of

Lear in the present appeal, and, of course, it could not have been con-

sidered by the district court. Under these circumstances, we feel it should

be first presented to the trial court for its consideration.”

contracting party either that it would not legally chal-

lenge the Besly patent or that it acknowledged the pat-

ent’s validity” and inasmuch as some of those concessions

were to continue “during the life of this agreement or

thereafter,” the district court concluded that “Besly had

gained and retained control of a substantial portion of

the swaging tap market.” Bendix Corp. v. Balax, Inc.,

321 F. Supp. 1095, 1096 (E.D. Wis. 1971).*

The basic facts may be summarized as follows: Until

1950 a cutting tap was the only tool available in the

United States for internal thread forming. In 1950 at

least two manufacturers began making swaging taps. In

1957 the plaintiff commenced marketing its improved

swaging tap in regard to which it eventually obtained

three patents.

Plaintiff's earliest swaging tap patent was issued in

1957 and reissued as Re. 24,572 on December 2, 1958.

Patent No. 2,991,491 was issued on July 11, 1961. Patent

No. 3,050,755 was issued on August 28, 1962.

Defendant Balax was incorporated in 1959 and de-

fendant Van Vleet has been its president since then. From

May to November 1961, Van Vleet met and communi-

cated with representatives of plaintiff, at which time

*The district court said: “I find that in actual practice, Besly was

able to, and did, monopolize the swaging tap market and improperly

influence the pricing structure for the commodity. Besly was able to

negotiate the royalty rate charged to licensees in a substantial portion

of the market and was able to exert an excessive influence on pricing.

Having obtained concessions as to the ‘validity’ of its now invalid patent,

and having obtained waivers regarding judicial action, Besly was able

to, and did, monopolize the swaging tap market. Besly’s opportunity to

monopolize was enhanced by its having commenced actions against al-

leged infringers or by threatening to so do.” Jd.

wii

Van Vleet disclosed that he had been developing what

he considered a superior type of swaging tap. The dis-

cussions included the possibility of a cross-license agree-

ment between Balax and plaintiff. Van Vleet took copi-

ous notes of these discussions, which ended without any

agreements being reached.

Balax sold its first swaging tap on January 3, 1962, and

later obtained a patent on its “no lead error” swaging tap.

When plaintiff filed its complaint for infringement on

June 17, 1964, it also charged that Balax and Van Vleet

had appropriated plaintiff’s trade secrets. The district

judge, after the original trial, found that the information

disclosed by plaintiff to Van Vleet took great effort to

develop, had value to plaintiff, and was claimed by plain-

tiff to have been used by the defendants as a short cut

to get into the swaging tap business. 291 F.Supp. at

344-346. Nevertheless, the district court “concluded that

while the information disclosed by plaintiff constituted

trade secrets, no confidential relationship existed between

the parties.” 421 F.2d at 821. This Court affirmed the

district court’s finding that the defendants were not liable

for appropriation of plaintiff’s trade secrets.

At the time the infringement suit was filed in 1964,

plaintiff had license contracts with ten companies to act

as either a manufacturing licensee or sales outlet. Several

others were added prior to June 22, 1970, when the Su-

preme Court denied a petition for certiorari from this

Court’s opinion invalidating plaintiff's last patent. 399

U.S. 911, S.Ct. 2203, 26 L. Ed. 2d 562. At that time,

plaintiff notified all of its licensees of the cancellation

of their agreements.

According to flow diagrams furnished by both plaintiff

and defendants in their briefs, prior to June 22, 1970,

(1) plaintiff sold some of its kind of taps to distributors;

(2) plaintiff sold other of its kind of taps to purchasing

licensees who in turn sold them to other distributors;

(3) plaintiff's manufacturing licensees manufactured

plaintiff's kind of taps and sold them to other distributors;

(+) defendant Balax sold its own patented kind of taps

to other distributors; and (5) Balax’s licensed manufac-

turers made Balax’s kind of taps and sold them to yet

other distributors. Thus both plaintiff's and Balax’s re-

spective kinds of swaging taps reached the hands of some

of the approximately 20,000 independent distributors of

swaging and cutting taps. These distributors, in turn,

resold the taps to hundreds of thousands of machine shops

and other tap users throughout the country.

In seeking to support the judgment of the district court

upholding their counterclaim, the defendants have relied

primarily upon (1) the provisions of several of plaintiff's

license agreements which provided substantially that “Li-

censee agrees that it will not contest the validity of any

patent which is now a part of this Agreement during the

life of this Agreement and thereafter”; (2) the provisions

of several of plaintiff's sales contracts wherein the tap pur-

chaser acknowledged the validity of the underlying pat-

ent or patents without limiting the acknowledgment to

the life of the sales arrangement; (3) the bringing or

threatening to bring of patent infringement suits by the

plaintiff; and (+) the granting of nonexclusive licenses

and the exaction of royalties by plaintiff as consideration

for not bringing infringement suits.

III

In the prior appeal, Judge Hastings, speaking for

this Court and after pointing out that defendants’

ee, |

counterclaim charged two violations of federal antitrust

laws, the first of which was “illegal procurement and en-

forcement of patents” under the doctrine of fraud-prac-

ticed-on-the-patent-office of Walker Process Equipment,

Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172,

86 S. Ct. 347, 15 L. Ed. 2d 247 (1965), said at 421 F. 2d

819:

“The district court specifically found that defen-

dants had not met their burden of proving fraud

on the patent office by clear and convincing evidence

as required in Armour & Co. v. Wilson & Co., 7 Cir.,

274 F. 2d 143, 148 (1960). Our examination of the

record leads us to conclude that such finding is not

clearly erroneous and thus we accept it. According-

ly, the conclusion of the district court that this claim

of antitrust violation is without merit should be

approved.”

This conclusion constituted the law of the case and estab-

lished that the invalidity of the plaintiff's patent was the

result of an error of judgment by the patent office based

upon good faith applications by the plaintiff. Hence,

the fact of invalidity has no probative value in the case

in attempting to establish any antitrust violation.

The defendants’ second contention of plaintiff's viola-

tion of Sections | and 2 of the Sherman Act, as analyzed

by Judge Hastings in the first appeal, was that “even if

all of plaintiff's patents were valid, plaintiff would be

guilty . . . for the reason that they have misused their

patents to extend the patent monopoly beyond the scope

permitted by the Constitution and the Congress.” Jd.

Every patent misuse does not constitute a per se

antitrust violation,” excusing proof of precise damage or

*“And if there was such patent misuse, it does not necessarily fol-

low that the misuse embodies the ingredients of a violation of either

§1 or §2 of the Sherman Act, ...” Zenith Radio Corp. v. Hazeltine

Research, Inc., 395 U.S. 100, 140, 89 S. Ct. 1562, 1585, 23 L. Ed. 2d

129 (1969).

Peay

foreclosing inquiry into reasonableness.° The Report of

the Attorney General’s National Committee to Study the

Antitrust Laws 254 (1955) concluded that “[f]rom some

abuses of patent policy may flow consequences not drastic

enough to meet antitrust prerequisites of effect on com-

petition.”*

6 The causes and effects of per se antitrust violations were capsulated

in Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5, 78

S. Ct. 514, 518, 2 L. Ed. 2d 545 (1958): “However, there are certain

agreements or practices which because of their pernicious effect on

competition and lack of any redeeming virtue are conlusively presumed

to be unreasonable and therefore illegal without elaborate inquiry as

to the precise harm they have caused or the business excuse for their

use. This principle of per se unreasonableness not only makes the type

of restraints which are proscribed by the Sherman Act more certain to

the benefit of everyone concerned, but it also avoids the necessity for

an incredibly complicated and prolonged economic investigation into the

entire history of the industry involved, as well as related industries, in

an effort to determine at large whether a particular restraint has been

unreasonable — an inquiry so often wholly fruitless when undertaken.

Among the practices which the courts have heretofore deemed to be

unlawful in and of themselves are price fixing. United States v. Socony-

Vacuum Oil Co., 310 U.S. 150, 210 [, 60 S.Ct. 811, 838, 84 L. Ed.

1129]; division of markets, United States v. Addyston Pipe & Steel

Co., 6 Cir., 85 F. 271 [L.R.A. 122], affirmed 175 U.S. 211 [, 20 S. Ct.

96, 44 L. Ed. 136]; group boycotts, Fashion Originators’ Guild [of

America] v. Federal Trade Comm., 312 U.S. 457 [, 61 S. Ct. 703, 85

L. Ed. 949] ; and tying arrangements, International Salt Co. v. United

States, 332 U.S. 392 [, 68 S. Cr. 12, 92 L. Ed. 20].”

7“We reject the view that any violation of patent law necessarily

violates the antitrust laws. From some abuses of patent policy may

flow consequences not drastic enough to meet antitrust prerequisites of

effect on competition. In addition, many patent abuses are more effec-

tively curbed by simply denying equitable relief as a matter of patent

policy. Holding every patent law transgression to be the same as an

antitrust violation would, moreover, put the patent owner on a different

footing than owners of other property subject to antitrust. For antitrust

has its own measure of permissiveness and wrongful conduct. To say

that action beyond the borders of the patent grant is a per se antitrust

violation is to ignore the Supreme Court’s distinction between the variant

statutory standards of the Sherman, Federal Trade Commission and

Clayton Acts as well as to repudiate the body of interpretations distin-

guishing between offenses unreasonable per se and those not.”

Therefore we must determine whether a patent misuse

occurred and if so, its nature and whether it constituted

an antitrust violation.

Congress has made it clear that the exaction of a

royalty and the granting of a non-exclusive license as

consideration for not suing for infringement, or suing

to prevent infringement, do not constitute, in and of them-

selves, misuse of a patent.® As we indicated in the prior

appeal and hold in this one, whether any antitrust viola-

tion has occurred must be measured as though the plain-

tiff’s patents were valid. Correlatively, an infringement

suit does not become an antitrust violation because a pat-

ent is held invalid.°

The district court concluded that plaintiff monopolized

the swaging tap market by, among other matters, “Ch jav-

ing obtained concessions as to the ‘validity’ of its now

invalid patent, and having obtained waivers regarding

judicial action.” 321 F. Supp. at 1096."

8 Section 271(d) of the Patent Code provides that “No patent owner

_ shall be . . . deemed guilty of misuse or illegal extension of the

patent right by reason of his having done one or more of the following:

(1) derived revenue from acts which if performed by another without

his consent would constitute contributory infringement of the patent;

(2) licensed or authorized another to perform acts which if performed

without his consent would constitute contributory infringement of the

patent; (3) sought to enforce his patent rights against infringement

or contributory infringement.” 35 U.S.C. §271(d).

®35 U.S.C. §282: “A patent shall be presumed valid.” If this were

not so every time a patent was declared invalid every action which had

been taken in reliance upon it would be subject to damage suits. This

in turn would make it too hazardous to ever seek a patent.

10 The language used by the plaintiff in several of its license agree-

ments provided: “Licensee agrees that it will not contest the validity

of any patent which is now a part of this agreement during the life of

this agreement and thereafter.”

In 1950, the Supreme Court held that “the general

rule” was that a patent licensee operating under a license

agreement was estopped to deny the validity of his li-

censor’s patent in a suit for royalties. Automatic Radio

Manufacturing Co. v. Hazeltine Research, Inc., 339 U.S.

827, 836, 70 S. Ct. 894, 94 L. Ed. 1312.

All of the licensee restrictions imposed by the plaintiff

occurred subsequent to 1950. The plaintiff commenced

its infringement suit in 1964. The district court’s first

judgment was rendered in 1968.

On June 16, 1969, the Supreme Court decided Lear,

Inc. v. Adkins, 395 U.S. 653, 89 S. Ct. 1902, 23 L. Ed. 2d

610, holding that a licensee is not estopped to interpose

the invalidity of the licensed patent as a defense to an

action by the patentee-licensor to enforce the license

agreement. The Court expressly overruled its 1950 hold-

ing to the contrary.”

Thereafter, we remanded this case to the district court

to consider “the relevance, if any, of Lear.” 421 F.2d

at 821. The district court apparently assumed that Lear

was relevant and that the license restrictions constituted

per se antitrust violations in the light of Lear. The court

did not consider whether Lear is to be applied retroac-

tively.”

11 The Court stated: “We are satisfied that Automatic Radio Manu-

facturing Co. v. Hazeltine Research, Inc., . . . itself the product of a

clouded history, should no longer be regarded as sound law with re-

spect to its ‘estoppel’ holding, and that holding is now overruled.” Jd.

at 671, 89S. Ct. at 1911.

12In an earlier opinion, the same district judge held that Lear was

not to be retroactively applied. Kearney & Trecker Corp. v. Giddings

& Lewjs, Inc., 306 F. Supp. 189, 201 (E.D. Wis. 1969). We reversed

on other grounds, finding that a fraud had been committed on the

patent office, that Walker Process Equipment, Inc. v. Food Machinery

& Chemical Corp., 382 U.S. 172, 86 S. Ct. 347, 15 L.Ed. 2d 247,

applied and that the conduct there involved was “predatory.” 452 F. 2d

579, 599 (7th Cir. 1971).

Recently the Supreme Court in Chevron Oil Co. v.

Huson, 404 U.S. 97, 106-107, 92 S. Ct. 349, 355, 30 L. Ed.

2d 296 (1971), summarized the factors to be considered

in determining whether unconstitutional, noncriminal

cases are to be applied nonretroactively™ as a matter of

stare decisis:

“In our cases dealing with the nonretroactivity

question, we have generally considered three separate

factors. First, the decision to be applied nonretroac-

tively must establish a new principle of law, either

by overruling clear past precedent on which litigants

may have relied .. . or by deciding an issue of first

impression whose resolution was not clearly fore-

shadowed, ... Second, it has been stressed that ‘we

must . . . weigh the merits and demerits in each

case by looking to the prior history of the rule in

question, its purpose and effect, and whether retro-

spective operation will further or retard its opera-

tion.’ ... Finally, we have weighed the inequity im-

posed by retroactive application, for ‘[w]here a de-

cision of this Court could produce substantial in-

equitable results. if applied retroactively, there is

ample basis in our cases for avoiding the “injustice

or hardship” by a holding of nonretroactivity.’”

In Lear, there was an express overruling of a past

precedent. Although the Court noted that “[]]ong be-

fore Hazeltine was decided, the estoppel doctrine had

been so eroded that it could no longer be considered

the ‘general rule’” (395 U.S. at 664, 89 S.Ct. at 1908),

nevertheless in Hazeltine the Court characterized it as

13 The Court quoted the basic notion from Griffin v. Illinois, 351 U.S.

12, 26, 76 S. Ct. 585, 594, 100 L. Ed. 891 (Frankfurter, J., concurring

in judgment) that “[|w]e should not indulge in the fiction that the law

now announced has always been the law. . . .” Jd. at 107, 92 S.Ct.

at 356.

the general rule."* Whether Hazeltine was “clear past

precedent” to the Supreme Court in 1971, the unqualified

pronouncement in that case undoubtedly made the doc-

trine clear enough to parties relying upon it from 1950

to 1971.

The prior history of the estoppel doctrine, its purpose

and effect, and its merits and demerits were thoroughly

canvassed in Lear. The Court began its analysis with a

statement of the competing policies:

“The uncertain status of licensee estoppel in the

case law is a product of judicial efforts to accom-

modate the competing demands of the common law

of contracts and the federal law of patents. On the

one hand, the law of contracts forbids a purchaser

to repudiate his promises simply because he later

becomes dissatisfied with the bargain he has made.

On the other hand, federal law requires that all

ideas in general circulation be dedicated to the com-

mon good unless they are protected by a valid patent.

Sears, Roebuck v. Stiffel Co., supra [376 U.S. 225

[84 S. Ct. 784, 11 L. Ed. 2d 661] (1964) ]; Compco

Corp. v. Day-Brite Lighting, Inc., supra [376 USS.

234 [84 S. Ct. 779, 11 L. Ed. 2d 669] (1964) ]. When

faced with this basic conflict in policy, both this

Court and courts throughout the land have naturally

sought to develop an intermediate position which

somehow would remain responsive to the radically

different concerns of the two different worlds of

contract and patent. The result has been a failure.

Rather than creative compromise, there has been a

chaos of conflicting case law, proceeding on incon-

sistent premises. Before renewing the search for an

acceptable middle ground, we must reconsider on

their own merits the arguments which may properly

14 The Supreme Court of California in Lear had described the estoppel

doctrine as “one of the oldest doctrines in the field of patent law.”

67 Cal. 2d 882, 891, 435 P. 2d 321, 325 (1967).

be advanced on both sides of the estoppel question.”

395 U.S. at 668, 89 S.Ct. at 1910.

The Court concluded its survey of the estoppel doctrine

by determining:

“Surely the equities of the licensor do not weigh

very heavily when they are balanced against the im-

portant public interest in permitting full and free

competition in the use of ideas which are in reality

a part of the public domain. Licensees may often be

the only individuals with enough economic incentive

to challenge the patentability of an inventor’s dis-

covery. If they are muzzled, the public may con-

tinually be required to pay tribute to would-be

monopolists without need or justification. We think

it plain that the technical requirements of contract

doctrine must give way before the demands of the

public interest in the typical situation involving the

negotiation of a license after a patent has issued.”

Id. at 670, 89S. Ct. at 1911.

The key policy motivation weighing the scales in

Lear in favor of outlawing licensee estoppel was obvi-

ously the “unmuzzling” of licensees to challenge patenta-

bility. Clearly, that unmuzzling occurred instanter the

day Lear was decided. Consequently, it operates retro-

spectively in the sense that it affected the executory por-

tion of license restrictions regardless of when they were

negotiated and entered into by the parties. As of June

16, 1969, such restrictions became null and void and un-

enforceable. Massillon-Cleveland-Akron Sign Co. v.

Golden State Advertising Co., 444 F.2d 425, 427 (9th

Cir. 1971); Panther Pumps & Equipment Co., Inc. v.

Hydrocraft, Inc., 468 F.2d 225, at 231 (7th Cir. 1972).

On the other hand, it is difficult to see how the award-

ing of damages (assuming they would be provable as

proximately caused by a restriction) would effectuate any

unmuzzling, particularly in this case where the defend-

ants are not licensees and were never subjected to the

restrictions.

In an analogous situation, the Sixth Circuit has held

that a license restriction voidable under Lear is not void

ab initio, entitling the licensee to recoup royalties already

paid. Troxel Manufacturing Co. v. Schwinn Bicycle Co.,

465 F.2d 1253 (6th Cir. August 11, 1972).°

To award damages occurring prior to the decision of

Lear, based upon the license restrictions voided on that

date, would not enforce Lear’s policy but would be purely

punitive, a result not warranted where, as here, no fraud

nor bad faith was shown to be involved. This brings us

to the third factor determining retroactivity: it would

lead to inequitable results to apply Lear retroactively

insofar as damages are concerned in the present case.’®

15 Although such a holding may seem to fly in the face of the Supreme

Court language that “Lear must be permitted to avoid payment of all

royalties accruing after Adkin’s 1960 patent issued” (395 U.S. at 674,

89 S. Ct. at 1913), the Sixth Circuit points out that Lear had terminated

all license payments prior to the issuance of the patent and that no

royalties were paid after the patent issued. 465 F.2d 1253, page 1259.

Thus, there was no question of recouping royalties previously paid.

16 For example, in United States v. General Electric Co., 272 U-S.

476, 47 S.Ct. 192, 71 L. Ed. 362 (1926), the Court held that a pat-

entee did not violate the antitrust laws by appointing del credere agents

who sold patentee’s products on consignment at a price fixed by the

patentee. In Simpson v. Union Oil Co., 377 U.S. 13, 84 S.Ct. 1051,

12 L. Ed. 2d 98 (1964), the Court held that resale price maintenance

through coercive ‘“‘consignment” agreements violated the antitrust laws.

Although the Court sought to distinguish General Electric on the ground

that the product involved there was patented, Mr. Justice Stewart,

dissenting, concluded that “‘[i]t is clear, therefore, that the Court today

overrules General Electric.” Jd. at 29, 84 S. Ct. at 1061. Justices Bren-

nan and Goldberg were concerned with “agreements that may have been

entered into in reliance upon United States v. General Electric.” Id. at

31, 84 S. Ct. at 1059. Obviously with these considerations in mind, the

PEP RT NSD INOS PM re

We conclude, therefore, that Lear should not be applied

retroactively to this case in its damage aspects.

Consequently, the portion of plaintiff’s license

agreements providing that the licensee “will not contest

the validity of any patent which is now a part of this

agreement during the life of this agreement” did not

constitute a misuse of the patent. The clause became null

and void on June 16, 1969, and the patents on which it

was based became invalid shortly thereafter as a result

of this Court’s final decision in that regard. 421 F.2d

809, cert. denied, 399 U.S. 911, 90 S. Ct. 2203, 26 L. Ed.

2d 562 (1971). At that point the policy of Lear had been

vindicated.

However the problem here is complicated by the

fact that some of the plaintiff’s license agreements pur-

port to extend the no-contest provisions beyond the life

of the agreements and some of its sales agreements pur-

port to extend the acknowledgment of patent validity

beyond the life of the agreement."’ In Brulotte v. Thys

majority opinion by Mr. Justice Douglas decided that “[w]e reserve

the question whether, when all the facts are known, there may be any

equities that would warrant only prospective application in damage

suits of the rule governing price fixing by the ‘consignment’ device which

we announce today.” Jd. at 24-25, 84 S.Ct. at 1058. On remand, the

district court found that the new rule would be unfair to the litigant

in that case, precluding damages. The Supreme Court reversed, hold-

ing that the reserved question did not apply to the litigants in that case

but to the prospective application of the new rule in other cases. Simp-

son v. Union Oil Co., 396 U.S. 13, 14, 90 S.Ct. 30, 24 L. Ed. 2d

13 (1969).

17 Defendants seek support for the judgment in their favor in the

fact that some of plaintiff’s license agreements including the restrictive

language were purchase licenses and others were manufacturing licenses,

but they cite no authority which would lend significance to the dis-

tinction. Plaintiff on the other hand relies on Baldwin-Lima-Hamilton

Corp. v. Tatnall Measuring Systems Co., 169 F.Supp. 1, 26 (E.D.

Pa. 1958), aff’d., 268 F.2d 395 (3rd Cir.), cert. denied, 361 U.S.

{

Co., 379 U.S. 29, 85 S.Ct. 176, 13 L. Ed. 2d 99 (1964),

the Court found a per se misuse of patent where royalty

payments under license agreements projected beyond the

expiration date of the last covered patent." The misuse

was based on activities (exaction of royalties) occurring

in the post-expiration period.

Here the licensees were purportedly agreeing not to

contest the validity of plaintiff's patents after the termina-

tion of the license agreement.”® There is no evidence in

the record that any licensee terminated his license ar-

rangement with the plaintiff and hence no post-expiration

activities actually took place.

However, some misuse may be inferred from the mere

Presence of the “thereafter” clause. Licensees and pur-

chasers may have been induced to continue their licensing

or purchasing arrangements with the plaintiff because if

they terminated those arrangements to seek to deal with

a competitor such as defendant, they would, prior to

894, 80S. Ct. 190, 4 L. Ed. 2d 151 (1959), where similar licenses were

involved and the court said: “The purchase requirement pertained to

patented gages only .... It is to be noted that the licenses do not

prevent the licensees from buying gages of any kind, in any quantities,

and from whomsoever the licensees pleased, so long as the gages do not

infringe Baldwin's patents. In effect, the agreements are undertakings

not to infringe the Baldwin patents.”

** The Court distinguished (and presumably was then still acknow!-

edging favorably) Automatic Radio Manufacturing Co. vy. Hazeltine

Research, Inc., 339 U.S. 827, 70 S.Ct. 894, 94 L.Ed. 1312, by

pointing out that there “[w]hile some of the patents under that license

apparently expired, the royalties claimed were not for a period when

all of them had expired.” 379 U.S. at 33, 85 S.Cr. at 179.

** Although each license agreement would expire by its terms with

the expiration of the covered patents “and improvements thereon, and

under any divisions, continuations, reissues or extensions thereof” never-

theless the terms of the various license agreements could expire while

the patents remained in effect since the licensor could terminate for

breach and the licensee could terminate without cause, each upon giving

60 days’ written notice.

Lear, have been unable to defend against an infringement

suit by the plaintiff. Nevertheless, in order to succeed

in their counterclaim the defendants must show all of

the elements necessary to create an antitrust cause of ac-

tion, including damages suffered by the defendants as a

proximate result of illegal acts of the plaintiff.

Much of defendants’ evidence intended to show

antitrust damages is based upon the alleged failure of

the business of Balax to progress in an economically satis-

factory manner due to the financial pressures of main-

taining its defense to this lawsuit. Even as such damages,

if proved, are not recoverable from a patent law stand-

point inasmuch as a suit to prevent infringement is not

a patent misuse (35 U.S.C. §271(d)),* neither are the

same damages recoverable from an antitrust standpoint

unless the suit is an integral part of a conspiracy to re-

strain trade or to monopolize” over and beyond the pro-

tection afforded by the presumptively-valid patent rights.”

2°See footnote 8. In the prior appeal, this Court concluded that “we

do not find adequate grounds for making an award of attorneys’ fees to

defendants.” 421 F.2d 809, 821.

21 Dairy Foods, Inc. v. Dairy Maid Products Cooperative, 297 F. 2d

805, 809 (7th Cir. 1961) ; Clapper v. Original Tractor Cab Co., 270

F.2d 616, 623-624 (7th Cir. 1959), cert. denied, 361 U.S. 967, 80

S. Ct. 588, 4 L. Ed. 2d 547 (1960). In both the Clapper and Dairy

Foods cases, two or more patentees were alleged to have conspired to

pool their patents. See Hartford-Empire Co. v. United States, 323

U.S. 386, 165 S. Cr. 373, 89 L. Ed. 322 (1945). The nexus between

patent misuse and possible antitrust violations is a close and obvious

one in patent pool situations.

*2 Laitram Corp. v. Deepsouth Packing Co., 279 F. Supp. 883, 891

(E.D. La. 1968): “ ‘Where * * * the infringement suit and notices

sent to the trade at the commencement of such suit are the sole cause

of damage suffered by the claimant’ we are told by a writer who is

backed by ample authority, ‘the courts have uniformly refused recovery

of treble damages’ [ Note, 52 Col. L. Rev. 936, 937 (1952) }.”

Our examination of the record discloses no action by the

plaintiff relating to the institution of this lawsuit which

differs in any material respect from that of any patentee

who has assumed that his patent is valid.

The defendants’ original counterclaim, filed on June

30, 1964, did not allege much more than that “Defendants

have continually been harassed by Plaintiff and have

been the victims of illegal conspiracies in restraint of

trade and of interference with contract.” An amended

counterclaim was filed on February 14, 1966, stating,

among other allegations, that the plaintiff and its licensees

had agreed to handle plaintiff's taps only and that one

of plaintiff's officers “regularly meets with representatives

of ‘competitive’ tap manufacturers in a Metal Cutting

Tool Institute and at Tap Standards meetings.”

After hearing the evidence in the original trial (at

which most of the evidence in the record now before us

was adduced), the trial jurge found (291 F. Supp. 328,

348) :

“In my opinion, this counterclaim may not succeed

because (1) there was no adequate proof of fraud

in procuring the patents in suit, (2) the plaintiffs

are not properly chargeable with illegal enforce-

ment of their patents, and (3) there has been no

sufficient showing of an illegal combination to re-

strain trade.”

Upon remand there was a two-day trial at which proof

was limited to that which was not available at the time

of the previous trial The trial judge’s findings at the

conclusion of the remand trial included a finding that the

plaintiff “improperly influenced the pricing structure of

swaging taps and exerted an excessive influence on the

price thereof” (Finding of Fact 17) and that the “sales

to consumers by distributors for Besly and its licensees

legge -

were at .. . identical list prices. . . .”(Finding of Fact

19). The evidence shows that swaging taps are sold at

approximately the same price.’ We have searched the

record in vain in an effort to find any other evidence

tending to support the trial judge’s finding, not of price-

fixing, but of improper price influencing.**

Although “[n]o formal agreement is necessary

to constitute an unlawful conspiracy,” American Tobacco

Co. v. United States, 328 U.S. 781, 809, 66 S.Ct. 1125,

1139, 90 L. Ed. 1575 (1946), similarity in the sale of

standardized products does not alone make out a case

of collusive price fixing, the reason being that competi-

tion will ordinarily cause one producer to charge about

the same price charged by any other.** United States v.

International Harvester Co., 274 U.S. 693, 708-709, 47

S. Ct. 748, 71 L. Ed. 1302 (1927); Cement Mfrs. Pro-

tective Ass’n v. United States, 268 U.S. 588, 605-606,

45 S.Ct. 586, 69 L.Ed. 1104 (1925). The Supreme

Court “has never held that proof of parallel business

*3"lhe evidence consisted of (1) the statement of the General Sales

Manager of Balax who testified that prices were identical “so far as I

know” (A. 535-536) ; (2) the statement of plaintiff's General Manager

that prices were “pretty comparable” (A. 568); and (3) documentary

evidence that two of plaintiff's licensees had identical prices and dis-

counts on one tap size (Tables 3 and 6, Add. A.).

*4 Defendants in their brief point out that plaintiff and all but two

of its licensees (and, as supplemented by plaintiff's reply brief, three of

the Balax licensees) are members of the Metal Cutting Tool Institute.

In Maple Flooring Mfrs. Ass’n v. United States, 268 U.S. 563, at

584, 45 S. Cr. 578, at 585, 69 L. Ed. 1093 (1925), the Supreme Court

said: “We do not conceive that the members of trade associations be-

come . . . conspirators merely because they gather and disseminate in-

formation . . . bearing on the business in which they are engaged and

make use of it in the management and control of their individual

businesses. ...”

** In this case the distributor prices of Balax were approximately the

same as plaintiff's prices to distributors (A. 673).

behavior conclusively establishes agreement or, phrased

differently, that such behavior itself constitutes a Sher-

man Act offense.” Theatre Enterprises, Inc. v. Para-

mount Film Dist. Corp., 346 U.S. 537, 541, 74 S.Ct.

257, 259, 98 L. Ed. 273 (1954). We conclude that there

was no evidence to support a conspiracy to fix or influ-

ence prices.

As in Kearney & Trecker Corp. v. Giddings &

Lewis, Inc., 452 F.2d 579, 600 (7th Cir. 1971), cert.

denied, 405 U.S. 1066, 92 S. Ct. 1500, 31 L. Ed. 2d 796

(1972), the defendants have argued here that “plaintiff's

dominant position, coupled with its restrictive licensing

practices, has enabled it to enhance the price level.”

Our response to this argument continues as there: “If

this be so, defendant, as a competing manufacturer of

machines, would not have been injured.”

There being no evidence to support any per se antitrust

violations,” we proceed to consider whether the totality

of evidence, although not constituting patent misuse nor

per se antitrust violations, did constitute an attempt by

plaintiff to monopolize interstate commerce, which caused

damage to the defendants.

6 Although the prices of swaging taps to distributors were unaffected

by a price war in the cutting tap market, nevertheless the price war

had caused a 20-25% decrease in plaintiff's sales of swaging taps (A.

564-65).

*7 We recognize that the trial court found that plaintiff “unlawfully

foreclose[d] competitors” (F.F. 18) and that this could rise to a per se

violation (United States v. Griffith, 334 U.S. 100, 107, 68 S. Ct. 941,

92 L. Ed. 1236 (1948) ) but we consider this argument infra as part of

our consideration of monopoly power.

ee ee ee ee

The heart of the trial court’s legal conclusion

after remand was that:

“The acts of Besly and Besly’s agreements with

purchasers of its swaging taps and with its patent

licensees violated the Sherman Act because they con-

stituted an attempt by Besly to monopolize trade or

commerce between the states of the United States

in said swaging tap market.” (Conclusion of Law

No. 3.)

Section 2 of the Sherman Act proscribes attempts to

monopolize. In the words of Judge Learned Hand, “In

order to fall within §2, the monopolist must have both

the power to monopolize, and the intent to monopolize.”

United States v. Aluminum Co. of America, 148 F.2d

416, 432 (2nd Cir. 1945). See also, Bernard Food In-

dustries, Inc. v. Dietene Co., 415 F.2d 1279, 1284 (7th

Cir. 1969) cert. denied, 397 U.S. 912, 90 S.Ct. 911, 25

L. Ed. 2d 92 (1970).

The trial court defined the relevant product

market to be “the sale for resale of swaging taps.” This

market definition ignored the evidence in the record of

interchangeability among swaging taps and cutting taps.

In United States v. Du Pont & Co., 351 U.S. 377, 394-

395, 76 S.Ct. 994, 1006, 100 L. Ed. 1264 (1956), the

Court said:

“When a product is controlled by one interest,

without substitutes available in the market, there is

monopoly power. Because most products have pos-

sible substitutes, we cannot . . . give ‘that infinite

range’ to the definition of substitutes. Nor is it a

proper interpretation of the Sherman Act to require

that products be fungible to be considered in the rele-

vant market.

“. . . In considering what is the relevant market

for determining the control of price and competition,

no more definite rule can be declared than that com-

modities reasonably interchangeable by consumers

for the same purposes make up that ‘part of the trade

or commerce,’ monopolization of which may be il-

legal.”

In addition to a considerable amount of testimony by

both sides as to the physical interchangeability and com-

petitive interchangeability of swaging taps and cutting

taps it is entirely clear from the defendants’ own ad-

missions that swaging taps are “reasonably interchange-

able” with approximately 50% of the cutting tap market.”

Using both of defendants’ hypotheses, namely that 50%

of the $60 million per year tap market is potentially in-

terchangeable between cutting and swaging taps and that

after an actual interchange the $30 million market would

decrease to $6 million by virtue of the relative inexpen-

siveness of the total volume of needed swaging taps, the

*8 A. 533-35, 538-39, 579-82.

*°In defendants’ brief, p. 43, they state:

“The advent of swaging taps seriously threatened the cutting tap

manufacturers for two reasons. First, swaging taps have no flutes so

that fluted blanks are not needed, and small competitors can readily enter

the market with a single thread grinding machine (A-465. 513). Sec-

ond, each swaging tap replaces on the average at least 10 cutting taps

(A-483). Hence although the swaging tap costs twice as much as a

cutting tap, swaging taps will replace cut ting taps for a consumer at

one-fifth the investment. The parties agree swaging taps can supersede

approximately 50% of the cutting taps now in use ( 4-483, 534, 566).

In other words, of approximately $60,000,000 in cutting taps sold,

$30,000,000 will be lost to swaging taps (A-566). However, when

swaging taps supersede the $30,000,000 worth of cutting taps, those

swaging taps will sell for only $6,000,000 because as noted each sWaging

tap, although costing twice as much as a cutting tap, will replace 10

cutting taps (A-483).

“Thus the intrusion of swaging taps into the cutting tap market re-

sults in very substantial losses to the established cutting tap manufac-

turers. . .” (emphasis added).

comparative market position of plaintiff (Besly), defend-

ant Balax and plaintiff’s licensees were as follows:

Percentage of $30 Million Tap Market

1968 1970

Besly 3.2% 2.7%

Balax 1.4 2.2

Besly Licensees 2.4 3.6

Percentage of $6 Million Tap Market

1968 1970

Balax 15.8% 13.4%

Balax 7.2 10.8

Besly Licensees 12.2 17.8

Accepting all alternatives in favor of the de-

fendants( that is, the $6 million market and combining

the plaintiff’s share of the market with the share of its

licensees) the combined market position of plaintiff and

its licensees is 31.2%. In the oft-cited words of United

States v. Aluminum Co. of America, 148 F.2d 416, 424

(2nd Cir. 1945), 33% control of a market “is not enough”

to constitute a monopoly.”

In Kearney & Trecker Corp. v. Giddings & Lewis,

Inc., 452, F.2d 579, 598 (7th Cir. 1971), cert. denied,

405 U.S. 1066, 92 S.Ct. 1500, 31 L. Ed. 2d 796 (1972),

we held that a patentee who controlled one-third of the

relevant market posed a “dangerous probability” of mo-

nopolizing that market. Although Judge Stevens stated

in that case that the dangerous probability test did not

“involve an evaluation of the actual likelihood that an

attempt would have succeeded if not frustrated by an

intervening event,” it is noteworthy, if not distinguish-

ing, that there the intervening event was exposure of a

3° On the other hand, 33.2% “is impressive,” United States v. Colum-

bia Steel Co., 334 U.S. 495, 533, 68 S.Ct. 1170, 92 L.Ed. 1533

(1948), although in that case not determinative.

AR eel

fraud on the patent office and engaging by the patentee

in predatory conduct, wheréas here the issuance of the

patents was procured in good faith by the plaintiff and

the intervening agent was this Court’s holding that the

patents were invalid. Once petition for certiorari was

denied, all of plaintiff's agreements based on the invali--

dated patents were cancelled (A. 565), thus terminating

plaintiff's ability to consummate any monopoly.

All of those facts and pertinent precedents, how-

ever, simply emphasize that in this case the question

of potential monopoly power is exceedingly delicately

balanced on several fine lines and we should not pur-

port to rely upon its existence or non-existence if in fact

the defendants have not met their burden of demonstrat-

ing that plaintiff's conduct “injured [them] in... [their]

business or property.” 15 U.S.C. §15.

Defendant Balax claimed and the district court found

that plaintiff's activities enabled it to “unlawfully fore-

close competitors, among others Balax. from a substantial

market, i.e., the sale for resale of swaging taps | F I 1S)

Balax not only had obtained ¢ peters an on omproved

type of swaging tap, but markers? char cop os ¢ seperior

product.”

31 Van Vleet testified «+

into the swaging tap marke

One, we were unable te po- sau

vendor blanks of suitable ous > \ .

to purchase blanks and were > ; le

much we — realized as the result 9+ vcs teow tie ie content

swaging taps were to the kind thar we 2 tents that we

have run and tests that our custoeness has > = the ) indicated a

marked superiority in our product [hore we could go into the

swaging tap business without the purchase without the capital in-

vestment of expensive fluting equipment and make 4 promt. We,

therefore, elected to work on that area and te meanwhile design our

own fluting equipment for the cutting taps so that we would be self-

TN MTT) niin...)

The dollar volume of Balax swaging tap sales (round-

ed to the closest thousand dollars) were:

1964 $108,000

1965 156,000

1966 267,000

1967 332,000

1968 430,000

1969 484,000

1970 647,000 (projected)

Comparative sales of swaging taps in terms of percentages were:

1964 1965 1966 1967 1968 1969 1970

Besly 58% 50% 52% 45% 45% 50% 32%

8 15

Balax 10 17 20 23 26

Besly Licensees 33 39 33 38 35 27 42

Balax’s sales had increased at a steady, substantial rate

prior to the cancellation of Besly’s licenses on June 22,

1970; its share of the swaging tap market increased at

the same time in an impressive fashion and at the ex-

pense of Besly’s share of that market (the plaintiff’s li-

censees’ share also increasing but not as sharply as that

of Balax).

In the ordinary situation of proving damages allegedly

caused as the result of certain actions by another, the

injured person or corporation shows how its sales declined

during the pertinent period but even that is not deemed

sufficiently probative. In Continental Nut Co. v. Robert

L. Berner Co., 393 F. 2d 283, 286 (7th Cir.), cert. denied,

393 U.S. 923, 89 S.Ct. 254, 21 L.Ed. 2d 259 (1968),

sufficient and do all of our operations within our own four walls.”

Van Vleet also testified (A. 467): “Our methods at Balax are so

very different, our procedures, our operations, our machinery, is so very

different that if we tried to use Besly-Welles methods, we could not

operate our shop. We could not make a profit.”

The district court found after the first trial that ‘“‘when the plaintiffs

visited the Balax plant in 1965, they found very little in common be-

tween the two operations.” 291 F. Supp. at 345.

this Court said that “where .. . the plaintiff knows the

identity of the customers it claims to have lost and has

a record of the previous purchases of each, special dam-

ages in the form of profits lost because of the withdrawal

of patronage by such customers, to be recoverable, must

be proved with that specificity which shows the loss of

profit attributable to patronage withheld by the par-

ticular customer and that such withholding was the re-

sult of ... [the other party’s unlawful act].”

Here, where Balax’s sales increased very substantially,

the evidence of damages consists of (1) Van Vleet’s

testimony that he “thinks” that “one of the reasons” for

Balax’s Detroit representative discontinuing representing

Balax was because a Ford Motor Company plant to

which he hoped to sell taps had learned of the infringe-

ment suit (A. 508-10); (2) Van Vleet’s testimony that

“I believe our business amounted to something like 60

per cent of what it would have amounted to had this

action not been brought” (A. 51 1) and (3) Balax’s sales

manager’s testimony that but for the lawsuit sales would

be “I would say at least twice as much as we are cur-

rently [selling]” (A. 536-537) .®

%°This is a far cry from defendants’ relied-upon quotation from

Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 323, 91

S. Ct. 795, 798, 28 L. Ed. 2d 77 (1971) that “Zenith demonstrated

the fact and extent of its business injury by estimating the percentage

of the foreign market it would have enjoyed absent the conspiracy dur-

ing the four years prior to 1963 and showing the portion it actually

enjoyed during those years.” As demonstrated by the Supreme Court’s

earlier opinion in the same case, the “estimate” was based on carefully

calculated and precise facts. See 395 U.S. 100, 116, n. 11, 89 S.Ct.

1562, 1573, 23 L. Ed. 2d 129: “The computation of damages, prepared

by Zenith’s experts and accepted by the District Court, see 239 F. Supp.

at 76, reflects a comparison between Zenith’s percentage share of the

United States television market, ranging from 15.6% in 1959 to 21.7%

in 1963, and Zenith’s actual share of the Canadian market during the

same period, ranging from 3.1% in 1959 to 5.2% in 1961 and down

to 3.2% in 1963.”

We have already discussed the fact that the institution

of the law suit in itself was not an actionable wrong here

and that defendants failed to prove that such institution

was an integral part of aconspiracy. It is further obvious

that the defendants have not proved any specific damages

nor shown beyond mere speculation that if any damages

were sustained, they were the result of any antitrust viola-

tions.

The same manufacturers, including plaintiff, who sup-

ply the swaging tap market also supply the cutting tap

market, except Balax which supplies only the swaging

tap market. There is no evidence in the record that plain-

tiff has played any part in excluding the defendants from

the cutting tap market. Yet the crucial testimony regard-

ing what Balax conceives to be its damages included the

following (A. 536, 537) :

“Q. Has Balax expanded its market geographi-

cally as far as you feel it can?

“A. No, definitely not.

“Q. What should Balax do in order to expand

the market further geographically? *

“A. We need a more complete line for one thing,

and we need representation in probably three addi-

tional areas in the country where we are not repre-

sented now and where there is a substantial volume

of tap business.

* * *

“Q. How would you expand your line so as to

be able to expand your market geographically ’

“A. The product which would be most closely

related to our line and, therefore, would lendgJmme!t

to selling to our current dealer and distrityftor \

ganization would be a line of cutting taps.”

In other words, Balax’s business has steadily increased

and would increase more if it carried cutting taps, which

it does not, through no reason proved to be attributable

to the plaintiff .

Although defendants concede that “the intrusion of

swaging taps into the cutting tap market results in very

substantial losses to the established cutting tap manu-

facturers,”** defendants would hypothesize without sup-

porting evidence that the cutting tap manufacturers

would conspire with the plaintiff (1) to keep the price

of swaging taps high although those of cutting taps were

dropping during a price war and (2) to restrict them-

selves through license agreements, all to the benefit of

plaintiff but to their own great detriment. We have

previously considered the pricing aspects and we now

add as we did in the Kearney & Trecker case, supra, that

“defendant never took a license . . . and to the extent

that those provisions made plaintiff’s licensees less effec-

tive competitors, defendant certainly was not harmed.”

452 F.2d at 600, n. 52. There is no evidence that the

defendants were foreclosed from any market or, if they

were, that they were injured.

We conclude that there was no per se patent misuse

and were no per se antitrust violations, which enable us

to consider the reasonableness of plaintiff’s actions and

to require that defendants prove damages with specificity

and also to prove that such damages, if any, were caused

by plaintiff's actions. In accordance with our preceding

analysis, we conclude that plaintiff’s actions in protecting

what it presumed to be a valid patent were reasonably

designed to effectuate that protection, that defendants

did not prove any recoverable damages, and that assum-

ing or speculating that damages were incurred by de-

33 See footnote 29.

ite. |

fendants, they failed to prove that such damages were

the proximate result of plaintiff’s actions.™

Therefore we reverse the district court’s judgment.

HASTINGS, Senior Circuit Judge (concurring in

the result).

In our decision of the first interlocutory appeal in this

case, Bendix Corporation v. Balax, Inc., 7 Cir., 421 F. 2d

809 (1970), cert. denied, 399 U.S. 911, 90 S. Ct. 223, 26

L. Ed. 2d 562, we made a final disposition of all issues

therein raised, except the one question remaining on the

remand. We noted that the trial court had rather sum-

marily brushed aside the charge of antitrust violations

by dismissing defendants’ antitrust counterclaim against

plaintiffs. Further, we observed that the parties did not

address themselves to the relevance, if any, of Lear, Inc.

v. Adkins, 395 U.S. 653, 668-671, 89 S. Ct. 1902, 23 L.

Ed. 2d 610 (June 16, 1969), to this issue in the prior

appeal, and that it could not have been considered by

the district court because Lear was subsequent to its

prior judgment. Under those circumstances “we [ felt]

it should be first presented to the trial court for its con-

sideration.” (Emphasis added.) We purposely withheld

our views on the “relevance, if any,” of Lear and did

not intend to indicate how the district court should re-

solve this matter. 421 F.2d at 820-821.

On remand, after further hearing, the district court

obviously thought Lear was relevant and found Bendix

and Sellew liable for damages to Balax and Van Vleet

%4Tn this opinion we have commented upon certain of the evidence.

The fact that we have not commented upon all of the some 600 exhibits

nor upon all of the some 1500 pages of testimony nor upon the many

depositions, is not intended to give any indication that we have not

considered all of it in reaching our conclusion.

for its Sherman Act violations. In all other respects, the

counterclaim was dismissed.

I find myself in agreement with that part of Part IV

of the majority opinion which contains the conclusion

“that Lear should not be applied retroactively to this case

in its damage aspects.” If Lear is not to be applied retro-

actively, and I agree that it should not be, then, in my

judgment, that effectively disposes of the present appeal.

Under the express terms of our prior remand “the rele-

vance, if any, of Lear” has been determined—it has none.

That settles the issue before us and the original dismissal

of the counterclaim should be reinstated.

I, therefore, join in that part of the majority opinion

holding that Lear should not be applied retroactively

and on this ground alone concur in the judgment of

reversal.

. pepe, |

United States Court of Appeals

For the Seventh Circuit

Chicago, Illinois 60604

January 16, 1973.

Before

Hon. JOHN S. HASTINGS, Sr. Circuit Judge

Hon. WALTER J. CUMMINGS, Circuit Judge

Hon. ROBERT A. SPRECHER, Circuit Judge

THE BENDIX CORPORATION and SELLEW

CORPORATION, Plaintiffs-Appellants,

No. 71-1483 vs.

BALAX, INC. and JOHN M. VAN FLEET (sic),

Defendants-Appellees.

Appeal from the United States District Court for the

Eastern District of Wisconsin. (64 C 170)

On consideration of the petition for rehearing and

suggestion that it be heard en banc filed in the above-

entitled cause, no judge in active service having requested

a vote thereon, nor any judge voted to grant the sug-

gestion, and a majority of the members of the panel

having voted to deny a rehearing,

IT IS ORDERED that the petition for a rehearing

in the above-entitled cause be and the same is hereby de-

nied.

APPENDIX B.

The BENDIX CORPORATION and Sellew

Corporation, Plaintiffs,

Vv.

BALAX, INC. and John M. Van Vleet, Defendants.

No. 64-C-170.

United States District Court,

E. D. Wisconsin

Jan. 8, 1971.

DECISION

MYRON L. GORDON, District Judge.

On January 30, 1970, the court of appeals vacated a

district court judgment which had dismissed Balax’s anti-

trust counterclaim against Bendix. 421 F.2d 809, 821

(7th Cir. 1970). The court of appeals remanded the case

for reconsideration of the anti-trust issue.

The court of appeals commented, at page 821:

“* * * the right to estop licensees from challenging

a patent is not part of the ‘limited protection’ af-

forded by the patent monopoly. F urthermore, the

reason is that it creates a danger of unwarranted

monopolization. Such danger may be even greater

here than in the usual licensee-estoppel case for the

reason that in the instant case the licensor sought to

create an irrevocable estoppel, not one merely ex-

tending during the life of the licenses and sales

agreements.”

The above quotation from the court of appeals un-

doubtedly constitutes the “law of the case”. In addition,

the correctness of the statement is supported by the testi-

orl eS eee

mony taken at the original trial and at the hearing on re-

consideration. For example, when Besly negotiated to

sell swaging taps to Pratt & Whitney, the latter con-

tracted not to contest the validity of the Besly patents

“during the life of this agreement or thereafter”. A sim-

ilar understanding was reached with Jarvis Corporation.

When Besly dealt with John Bath & Company regard-

ing a license, the latter company’s acknowledgment of

the validity of Besly’s patents contained no time limita-

tion. In negotiating with Cleveland Twist Drill Co., the

acknowledgment of the validity of Besly’s patent at first

was to last for “the life of said option”; this provision,

however, was stricken and thus, the concession as to valid-

ity continued for an indefinite period of time.

Besly had contracts with over a dozen different com-

panies to act as either a manufacturing licensee or a sales

outlet. Each agreement with the following companies

contained a concession by the contracting party either that

it would not legally challenge the Besly patent or that it

acknowledged the patent's validity: Hy-Pro Tool Com-

pany, United Greenfield Corporation, Union Twist Drill

Co., National Twist Drill & Tool Co., DoAll Company,

and Threadwell Tap & Die Co.

Balax correctly points out that as of June, 1970 there

were only two manufacturers of swaging taps in the

United States who were not licensed by Besly, to-wit:

Vermont Tap & Die Company and Balax. It is thus ap-

parent that through its agreements, Besly had gained and

retained control of a substantial portion of the swaging

tap market.

I find that in actual practice, Besly was able to, and

did, monopolize the swaging tap market and improperly

influence the pricing structure for the commodity. Besly

was able to negotiate the royalty rate charged to licensees

in a substantial portion of the market and was able to

exert an excessive influence on pricing. Having obtained

concessions as to the “validity” of its now invalid patent,

and having obtained waivers regarding judicial action,

Besly was able to, and did, monopolize the swaging tap

market. Besly’s Opportunity to monopolize was enhanced

by its having commenced actions against alleged infring-

ers or by threatening to so do. Through this technique, in

the words of International Salt Company v. United

States, 332 U.S. 392, 396, 68 S.Ct. 12, 15, 92 L. Ed. 20

(1947), Besly was able. unlawfully, “to foreclose com-

petitors from any substantial market.”

I conclude that Balax, Inc. and Mr. Van Vleet have

established their counterclaim and are entitled to judg-

ment. Their counsel may submit findings of fact and con-

Clusions of law for the court's consideration within 10

days from the date of this decision. Such document shall

also be served, at the same time. upon counsel for Bendix,

who are to have one week thereafter in which to file with

the court any objections to the Proposed findings of fact

and conclusions of law.

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF WISCONSIN

THE BENDIX CORPORATION,

a corporation of Delaware, and

SELLEW CORPORATION,

a corporation of I]linois,

Plaintiffs and

Counterclaim Defendants

Case No. 64C-170

BALAX, INC., a corporation of

Wisconsin, and JOHN VAN VLEET,

an individual,

Defendants and

Counterclaim Plaintiffs

FINDINGS OF FACT

AND CONCLUSIONS OF LAW

The Court makes the following Findings of ultimate

Facts based on (a) the record in the original trial (Jan-

uary 19-25, 1968), supplemented by (b) the additions to

the record in the Court of Appeals and the opinion of the

Court of Appeals, and (c) the record made at the hear-

ing in this Court on reconsideration on November 9 and

10, 1970.

Parties and Basic Chronology

Incident to this Litigation

1. This suit was instituted on June 17, 1964 by Besly-

Wells Corporation, an Illinois corporation (later known

as Sellew), against Balax, Inc., a Wisconsin corporation

(Balax), and John Van Vleet, an individual (Van Vleet).

The original plaintiff's corporate name was subsequently

changed to Sellew Corporation, and the caption of this

action was duly amended to reflect this fact.

The Complaint alleged (a) infringement of Besly’s

swaging tap patents by swaging taps manufactured and

sold by Balax, (b) the unlawful retention and use by

VanVleet and by Balax of Besly’s trade secrets, for which

Besly alleged it expected to receive as compensation

royalties on its swaging tap patents, and (c) the alleged

use by Balax of packaging and display material copied

from or deceptively similar to that employed by Besly,

to Besly’s damage. As early as April 20, 1962, Besly

had formally charged Balax with infringement of Besly’s

two swaging tap patents, Reissue 24,572 and 2,991,491,

and also with said unauthorized use of trade secrets, and

demanded an accounting for the profits and damages

resulting therefrom.

2. John VanVleet, a mechanical engineer, who prior

to 1959 had experience in the improvement of cutting

taps for which he obtained U.S. letters patent, was famil-

iar with swaging taps. In November, 1959 VanVleet

organized Balax, Inc. and was the owner of all of its

outstanding stock. From November, 1959 to January,

1962 Balax engaged in the building of tap thread grind-

ing machines by extensive conversions of second-hand

Excello machines, first in a little machine shop in Mil-

waukee, Wisconsin, and commencing in September, 1960

in a leased one-story plant with approximately 2000

square feet of manufacturing space and 1000 square feet

of office space, located in the Town of Merton, Waukesha

County, Wisconsin. The only products manufactured

and sold by Balax until 1969 were swaging taps which

Balax began selling in January, 1962.

On June 30, 1964 Balax and VanVleet filed their

Answer and their Antitrust Counterclaim in the above

entitled action, and Besly responded to the counterclaim

on July 6, 1964.

ee TT

3. In 1965 The Besly-Welles Corporation, a Delaware

corporation, was incorporated as a wholly-owned subsid-

iary of The Bendix Corporation (Bendix), and Besly-

Welles Corporation, an Illinois corporation, transferred

to The Besly-Welles Corporation twenty-three patents

and patent applications, including the swaging tap patents

involved in this litigation, and also

“all claims for damages by reason of past infringe-

ment of said letters patent with the right to sue for,

and collect the same for its own use and behoof, ... .”

Besly of Delaware then applied for and was given per-

mission in February, 1966 by this Court to intervene in

this action as one of the parties plaintiff therein upon a

Stipulation filed February 10, 1966, wherein among other

things the following appeared:

“6. The Besly-Welles Corporation shall be sub-

ject to and bound by all prior proceedings in this

taal

4. After said intervention, Balax and VanVleet ap-

plied for and received permission from this Court to,

and did on February 14, 1966 file an Amended Answer

and an Amended Counterclaim, and on May 2, 1966 Sel-

lew, the original plaintiff, and Besly of Delaware filed

a joint Answer to said Amended Antitrust Counterclaim

in which they prayed:

“that the counterclaim be dismissed and that this

court order the relief prayed for in Plaintiffs’ com-

plaint.”

This Court referred in its original Opinion to “the

plaintiffs collectively as Besly”, a procedure also followed

herein.

Material Chronology of the Three

Swaging Tap Patents Involved Here

5. The earliest swaging tap patent issued October 1,

1957, and was reissued as Re. 24,572 on December 2,

1958.

6. On July 11, 1961 Patent No. 2,991,491 for a flute-

less swaging tap issued. In a stipulated settlement of a

suit against Jarvis Corporation, this patent was in De-

cember, 1963 decreed valid by a Massachusetts United

States District Court. However, this Court on May 28,

1965 dismissed this action as to said patent with prejudice

upon an affidavit of Besly patent counsel that Besly’s own

first successful commercial swaging tap manufactured in

1956 and 1957 had anticipated and rendered void said

Patent No. 2,991,491 issued to Besly in 1961, and the

Balax and VanVleet motion for summary judgment on

their counterclaim was in this respect granted May 28,

1965.

7. The third patent, No. 3,050,755, issued August 28,

1962 for “Method of forming threads by applying sliding

pressure”.

8. Swaging taps made by Besly under its swaging tap

patents are known and sometimes herein referred to by

the Besly trademark as “X-Press” taps.

Preceding Jucial (sic) Action Herein

9. After the original trial, this Court held Patent Re.

24,572 valid and infringed, and Patent 3,050,755 invalid

though infringed if valid, and dismissed on the merits

plaintiffs’ claims in count II of the Complaint and the

action as to John M. VanVleet individually and also

dismissed on its merits the Amended Antitrust Counter-

claim of Balax and VanVleet.

LO OE LOOSE

t 4

10. While on appeal, Besly of Delaware, said wholly-

owned subsidiary of Bendix and Sellew Corporation,

filed a “Motion to Change the Title of This Suit” to

replace the name of The Besly Welles Corporation with

The Bendix Corporation, which the Court of Appeals

granted and thus Bendix became a named party in this

litigation by way of substitution for Besly of Delaware,

with Sellew continuing as a party plaintiff.

On said appeal, the remaining two Besly patents were

held invalid but said Antitrust Counterclaim dismissal

was on January 30, 1970 ordered vacated and remanded

for reconsideration. A petition for a writ of certiorari

to the Court of Appeals for the Seventh Circuit was de-

nied June 22, 1970.

11. The hearing on reconsideration was held on No-

vember 9 and 10, 1970, at which time all parties appeared

by counsel and, with respect only to liability for damages

as alleged in said Amended Antitrust Counterclaim, (a)

Bendix and Sellew adduced additional testimony and in-

troduced additional exhibits not available at the time of

the original trial, and (b) Balax and Van Vleet offered

in rebuttal additional testimony and documentary evi-

dence. The evidence received by the court at the hearing

on reconsideration was restricted by the order of the

District Court to that evidence which was not available

at the time of the original trial.

This Court filed its decision on January 8, 1971.

Relative Status of Balax and Besly and Besly’s

Patent Licensees in the Swaging Tap Market at

the time (a) this suit was started, (b) of the orig-

inal trial, and (c) of the reconsideration hearing

12. June 17, 1964

(a) Balax with four employees, in addition to Van

Vleet, and operating one tap thread grinding machine,

commenced making and selling swaging taps in January,

1962. On June 17, 1964, when this suit was started, Balax

was still operating only one thread grinding machine

but, in additien to Van Vleet, had four production em-

ployees and an office staff consisting of one girl, a ship-

ping clerk who also acted as truck driver and sales order

clerk, and also a mechanical engineer hired to take over

direct supervision.

Balax swaging tap sales for the fiscal year ending Oc-

tober 31, 1964, rounded out to the nearest thousand, were

$108,000, on which Balax realized no profit.

(b) By June, 1964, Besly had consummated five writ-

ten agreements under which purchasers agreed to buy

swaging taps only from Besly or its licensees, each pur-

chaser also in writing agreeing for an indefinite period

of time not to contest the validity of the Besly swaging

tap patents or acknowledging their validity. These pur-

chasers included DoAll Company, Cleveland Twist Drill

Co., John Bath & Co., Pratt & Whitney, and Threadwell

Tap & Die Co., a wholly-owned subsidiary of Bendix,

the last four of whom were tap manufacturers and were

granted options on Besly patent license wherein the li-

censee agreed not to contest the validity of the licensor’s

patents during the life of the license agreement “and

thereafter”.

In addition, Besly had licensed the following five tap

manufacturers, each agreeing in its patent license not to

contest the validity of the Besly swaging tap patents dur-

ing the life of the license agreement “and thereafter”,

to-wit, Hy-Pro Tool Co., a Division of Continental

Screw Co., United-Greenfield Corporation, National

Twist & Tool Co. and its domestic divisions Winter Bros.

CP OSL OMAR meee |

‘

Co. and Standard Tool Co., Union Twist Drill Co. and

Jarvis Corporation.

Besly sales for calendar 1962 and 1964 were $580,695

and $777,414, and sales by Besly’s licensees were respec-

tively $261,865 and $445,212 (calculated from PX 22

and currently applicable royalty rate as set forth in the

license agreement).

13. January 1968

(a) In January, 1968 when the original trial occurred,

there were, including Balax, five unlicensed swaging tap

manufacturers in the United States.

In fiscal 1967, Balax swaging tap sales were $332,000.

(b) In January, 1968, the time of the original trial,

although disclosed only at the later reconsideration hear-

ing, Besly had added as a patent licensee Morse Twist

Drill & Machine Co. and Pratt & Whitney.

The swaging tap sales of Besly were for calendar 1967

$895,400 and for fiscal 1967 those of its licensees, exclud-

ing Morse and Pratt & Whitney, were $747,536 (cal-

culated from 5% royalty rate and total royalties as in

PX 184). Besly did not dispute testimony that the ag-

gregate of these sales of Besly and its licensees were ap-

proximately 75% of all current domestic swaging tap

sales.

14. June 22, 1970 when Certiorari was denied

(a) As of June, 1970 there remained only two un-

licensed swaging tap manufacturers in the United States,

to-wit: Balax and Vermont Tap & Die Co. whose latest

Wedger tap Besly had also charged with infringement

in 1962. The swaging tap sales of Vermont Tap were

not established but the record indicates they were not

significant in amount.

In fiscal 1969 Balax swaging tap sales were $483,693.21.

(b) At the hearing on reconsideration on November

9 and 10, 1970, it was developed from testimony by a

witness and documents produced by Bendix that (i)

Cleveland Twist Drill Co. had on October 1, 1968 taken

a patent license from Besly and (ii) Besly had entered

into agreements for the sale of its swaging taps with IIli-

nois Tool Works, Brawn & Sharp, Wood & Spencer, and

Brubaker Tool Corp., and was also selling to its patent

licensees Morse Twist Drill, Cleveland Twist Drill Co.

and Jarvis Corporation.

In calendar 1969 the swaging tap sales of Besly were

$1,037,300, and in fiscal 1969 those of Besly’s licensees,

excluding Morse, Pratt & Whitney and Cleveland Twist

were $553,878.80 (calculated from PX 183 and 184 on

the basis of a 5% royalty).

15. The sales of swaging taps by Balax, by Besly and

by Besly’s patent licensees referred to above were all made

in the course of trade or commerce among the several

states of the United States. Except for an insignificant

amount of direct sales, all swaging tap sales were made

to distributors for resale to the consumer, and Besly’s

witness established that in accordance with industry prac-

tice such distributors were restricted by the respective

manufacturers to selling cutting taps and swaging taps

obtained from them. The record establishes that Besly

and only two of its licensees, United-Greenfield and Win-

ter Bros. division of National Twist, through their ex-

Clusive distributors sold 50% to 60% of the consumer

purchases of taps in the United States in 1961. The Besly

practice of tying to it the major cutting tap manufacturers

" 4

Sor |

in the United States by requirements purchase agreements

and patent licenses, each of which irrevocably waived

the defense of patent invalidity, unreasonably interfered

with the efforts of Balax to obtain distributors for its

Balax taps and from entering the cutting tap market

sufficiently to offer distributors a full line of taps, with

resultant injury to Balax and to Van Vleet.

16. Besly solicited and obtained agreements acknow]l-

edging the validity of the Besly swaging tap patents and

agreements not to contest the validity of the Besly patents

each for an indefinite period of time from purchasers

who agreed to purchase swaging taps only from Besly

or Besly licensees. Thus when Cleveland Twist Drill’s

letter acknowledged the validity of the Besly patents for

“the life of said option”, these words were stricken by

Besly and the concession as to patent validity continued

for an indefinite period of time. Besly also solicited

and obtained from numerous other tap manufacturers in

the United States patent license agreements for the Besly

swaging tap patents wherein the licensee specifically

agreed not to contest the validity of the Besly swaging

tap patents, including No. 2,991,491, during the life of

the license agreement “and thereafter”.

(a) As early as 1958, before its patent Re. 24,572 here

in suit had issued, Besly’s own letters reveal that Besly

approached both Detroit Tap and Tool Co. and Pratt &

Whitney seeking to induce them to take licenses from

Besly and to aid Besly in ensuring the patentability of

Besly’s pending patent application claims. To Detroit

Tap, Besly held out the prospect of increased profits for

both Besly and “competitors whom we know and respect”

if validity of Besly’s future patents could be assured.

To Pratt & Whitney, Besly held out the scarcely veiled

threat of a highly expensive and drawn out legal entangle-

ment if Pratt & Whitney failed to take a license under

Besly’s patents.

(b) Besly succeeded in inducing Hy-Pro Tool Com-

pany Division, Continental Screw Company, on July 3,

1959 to agree, without any limitation as to time, not to

contest the validity of Besly’s patents, and then filed suit

against the largest tap manufacturer, United-Greenfield

Corporation, on August 24, 1959. On December 23, 1959

United-Greenfield Corporation took a license acknowl-

edging validity of Besly’s patents and the infringement

suit was dismissed. Thereafter Besly added Union Twist

Drill Company and National Twist Drill & Tool Com-

pany as licensees with similar license agreements. On

May 24, 1962 Besly filed a patent infringement suit

against Jarvis Corporation, which was terminated by a

Consent Judgment on December 27, 1963 wherein the

court, upon application of both parties, found valid the

three Besly patents including Patent 2,991,491, which

in this action Besly’s counsel in May, 1965 conceded was

invalid because of Swaging taps previously made by Besly.

license under the Besly patents conditioned on making

and pricing Balax taps so as to preclude competition with

the Besly “X-Press” swaging taps made and sold by Besly

and Besly licensees, the Pertinent language of Besly Ex-

hibit 141 reading as follows:

“2.2 As a part of this agreement you will want a

license to make and sell Besly V-Press taps designed

to your new specification. You can readily appreciate

that we are not looking for new competitors in the

tap business. I assume therefore that we may stipu-

late in the agreement that you would concentrate on

the Balax style of tap and would sell these at the

higher price which their superior performance jus-

tifies and would not offer the conventional X-Press

tap, now on the market.”

(d) Besly patent license agreements obligated Besly

to prosecute third party infringers, “provided that good

business judgment requires bringing an infringement suit

or suits.” This contemplated, if it did not obligate, Besly

to confer with its non-exclusive licensees as to such suits,

as evidenced by Besly’s actions in respect to the com-

mencement of this suit against the Balax tap instead of

against Vermont’s Wedger tap, established by its letter of

June 4, 1964 to United-Greenfield reading as follows:

“In reference to our correspondence on Vermont's

“Wedger’ Tap, our executives and legal counsel feel

the ‘Balax’ Tap, made in a small shop near Mil-

waukee, poses more of a competitive threat in the

market than the ‘Wedger’ Tap.

We are therefore notifying ‘Balax’ that they may be

in violation of our patents. Our counsel feels it is

wise to tackle only one of our ‘unlicensed competi-

tion’ at a time, and we are therefore following this

route.

As progress is made, we will advise.”

17. Besly by said agreements gained and retained con-

trol of a substantial portion of the swaging tap market,

thereby monopolizing the same and by means thereof

improperly influenced the pricing structure of swaging

taps and exerted an excessive influence on the price

thereof.

18. Besly threatened and instituted suits against al-

leged infringers, and through this technique until July,

1970, when Bendix terminated the various purchase and

patent license agreements, Besly was able to and did

thereby unlawfully foreclose competitors, among others

Balax, from a substantial market, i.e., the sale for resale

of swaging taps.

19. The record discloses from testimony of the Besly

witness as well as Balax witness and documents, that the

list prices and discounts therefrom for swaging taps sold

by Besly and Besly patent licensees have been identical

since this suit was instituted, and that the periodical in-

creases in the swaging tap prices have not been affected

by price wars in cutting taps with respect to which the

Bendix witness testified at length at the reconsideration

hearing. The testimony of a Balax witness that the sales

to consumers by distributors for Besly and its licensees

were at said identical list prices was not challenged by

any competent evidence.

20. Besly’s acts and its agreements, as found in the

above Findings, injured the business and property of

John M. Van Vleet individually and also the business

and property of Balax, Inc. When this suit was instituted

Balax faced the necessity of choosing either (a) to cease

production of its Balax tap and for practical purposes go

out of business, (b) paying tribute with consequent in-

crease in production costs even if Besly would have

granted Balax a patent license, or (c) incurring the finan-

cial burden and expense of this litigation, which undis-

puted testimony established has also seriously interfered

with Balax developing production facilities and sales

territory, to the injury of the business and property of

Balax, Inc. and also the business and property of John M.

Van Vleet individually.

=P es ee |

CONCLUSIONS OF LAW

As to the law applicable to the Facts as above found,

this Court concludes:

1. The law of this case, to the extent set forth therein,

appears in the January 30, 1970 Opinion of the Court

of Appeals for the Seventh Circuit, reported in 42] F.2d

commencing at page 809, particularly as set forth on

page 821 and quoted by this Court in its Opinion filed

January 8, 1971.

2. The written agreements of Besly with purchasers

of Besly swaging taps and with Besly’s patent licensees,

violated the Sherman Act by unreasonably restraining

trade or commerce between the states of the United States

in the relevant product market for purposes of this case,

i.e., the sale for resale of swaging taps.

3. The acts of Besly and Besly’s agreements with pur-

chasers of its swaging taps and with its patent licensees

violated the Sherman Act because they constituted an

attempt by Besly to monopolize trade or commerce be-

tween the states of the United States in said swaging tap

market.

4. The monopoly seemingly granted by the swaging

tap patents issued to Besly and involved in this action was

by Besly’s acts and agreements extended beyond the law-

ful scope of said apparent monopoly as defined by the

Constitution and Statutes of the United States, and there-

by effected in violation of the Sherman Act an unwar-

ranted attempt to monopolize and a monopolization of

the swaging tap market.

5. The business and property of Balax, Inc. and also

that of John M. Van Vleet individually were injured by

the acts and agreements of Besly, which this Court con-

cludes as to said swaging tap market unreasonably re-

Strained trade or commerce among the several states and

constituted an attempt to monopolize said trade or com-

merce in said market, and Balax, Inc. and John M. Van

Vleet individually each sustained damages as a result of

said violations of the Sherman Act.

6. Bendix Corporation and Sellew Corporation, coun-

terclaim defendants, are jointly and severally liable un-

der Section 4 of the Clayton Act to Balax, Inc. and to

John M. Van Vleet individually, counterclaim plaintiffs,

for damages which each counterclaim plaintiff respec-

tively sustained from the aforementioned violations of

the Sherman Act.

Further proceedings will be held to determine the

amount of damages and attorneys’ fees to be paid to Balax,

Inc. and John M. Van Vleet.

Dated this /s/ 10th day of February, 1971.

/s/ Myron «L. Gordon

United States District Judge

Eastern District of Wisconsin

APPENDIX C.

The BENDIX CORPORATION, a corporation of Del-

aware, and Sellew Corporation, a corpogation of IIli-

nois, Plaintiffs-Appellees (Cross-Appellants),

Vv.

BALAX, INC., a corporation of Wisconsin, and John

M. Van Vleet, an individual, Defendants-Appellants

(Cross-Appellees).

Nos. 17343, 17344.

United States Court of Appeals,

Seventh Circuit.

Jan. 30, 1970.

* * *

Before CASTLE, Chief Judge, HASTINGS, Senior

Circuit Judge, and FAIRCHILD, Circuit Judge.

HASTINGS, Senior Circuit Judge.

Plaintiff's predecessors brought this action charging

defendants with infringement of three of its patents and

with appropriation of its trade secrets. Defendants coun-

terclaimed charging plaintiff with violations of the anti-

trust laws.

The original plaintiff was Besley-Welles Corporation,

an Illinois corporation. After this suit was commenced

its assets were acquired by Bendix Corporation of Dela-

ware. Its business is now operated as a division of Ben-

dix. The defendants are Balax, Inc., a Wisconsin cor-

Poration, and John M. Van Vleet, Balax’s founder and

President, a resident of Wisconsin.

Before trial, Plaintiff withdrew its patent No. 2,991,-

491, admitting its invalidity due to plaintiff’s own prior

Public use. The trial court held plaintiff's Patent Re.

24,572 valid and infringed; it held plaintiff’s Patent No.

3,050,755 infringed but invalid for Prior public use by

plaintiff ; it dismissed that Portion of the complaint charg-

ing defendants with appropriation of plaintiff's trade

secrets; it dismissed defendant Van Vleet as an individual

defendant; it denied Plaintiff's request for treble dam-

ages and attorneys’ fees; and it dismissed defendants’ anti-

trust counterclaim.

In No. 17343, defendants appeal from those parts of

the judgment herein holding Patent Re. 24,572 valid and

infringed and denying relief to defendants on their coun-

terclaim charging plaintiff with violations of the anti-

fees, a decree finding plaintiff in violation of

In No. 17344, plaintiff appeals from those Parts of the

judgment herein holding its Patent No. 3,050,755 invalid;

dismissing that Part of the complaint charging defen-

dants with appropriation of its trade secrets; dismissing

Van Vleet as an individual defendant; and denying plain-

tiff’s request for treble damages and attorneys’ fees.

The two remaining patents involved in this litigation

both relate to a device known as a fluteless SWaging tap.

Patent Re. 24,572. hereinafter referred to as the reissue

patent, covers the tool itself. Patent 3,050,755, hereinafter

r eee . Bins nee ETT AOS ERE PIE

referred to as the ’755 or method patent, covers the

method performed by the tool.

A tap is a tool used to form threads on the cylindrical

inner surface of a hole. A swaging tap forms threads by

deforming the metal and displacing it into the form of

the desired thread. A swaging tap, which forms no chips,

is to be distinguished from a cutting tap which forms

threads by cutting away the metal with cutting teeth. The

swaging method is said to be more economical and easier

to perform than the cutting method. Swaging taps have a

longer life than cutting taps. They produce no metal

chips. The costly and time consuming inspection and

cleaning of the work after the job is completed is thus

eliminated.

As found by the trial court, Patent Re. 24,572 1s a re-

issue of U.S. Patent No. 2,807,813. This tap has a shank

and a threaded section. The threaded section has a cylin-

drical portion where the threads are substantially the

same diameter and a tapered end portion where the

threads are of reduced diameter. The threads have high

spots or lobes with relieved areas in between these high

spots. It is the lobes that do the actual swaging work

since the relieved areas are out of contact with the ma-

terial being formed. When used, the tool is rotated into

a hole and the lobes force their way through the hole.

The displaced metal takes the shape of the tap threads.

The method of the ’755 patent is performed when the

tool of the reissue patent is used in the prescribed manner.

The method claims describe the application of pressure

from the tap threads and the movement of the metal as

it conforms its shape to that of the tap thread.

PATENT RE. 24,572 — VALIDITY

Defendants urge several reasons for the invalidity of

the reissue patent. Their first contention is that it is antici-

pated by the 1939 German Gebrauchsmuster Patent 1,-

455,626 (GM). Section 102(h) of Title 35, U.S.C.A.

provides “‘A person shall be entitled to a patent unless —

* * * (b) the invention we» patented or described in a

printed publication in this or a foreign country or in

public use or on sale in this country, more than one year

prior to the date of the application for patent in the

United States * * *.”

A GM is clearly a patent within the meaning of

this section, but it is not a printed publication. American

Infra-Red Radiant Co. v. Lambert Industries, Inc., 8

Cir., 360 F. 2d 977, 991-994, cert. denied, 385 U.S. 920,

87 S.Ct. 233, 17 L.Ed.2d 144 (1966); Permutit Co.

v. Wadham, 6 Cir., 13 F.2d 454, 458 (1926); Reeves

Bros., Inc. v. United States Laminating Corp., 282 F.

Supp. 118, 134-136 (E.D.N.Y. 1968); Permutit Co. v.

Graver Corp., 37 F.2d 385, 390 (N.D. Ill. 1930), aff'd

on other grounds, 7 Cir., 43 F.2d 898, 902 (1930), aff'd

284 U.S. 52, 52 S.Ct. 53, 76 L.Ed. 163 (1931) ; and Safety

Gas Lighter Co. v. Fischer Bros. & Corwin, 236 F. 955,

962 (D.N.J. 1916), aff'd, 3 Cir., 247 F. 1005, 159 C.C.A.

(1918).

‘A number of the opinions above cited ably set forth the nature of

a Gebrauchsmuster. The latest such effort is that of Judge Bartel in

Reeves Bros., supra at 134-135. “[A] Gebrauchsmuster is registered

under the German law after an application filed in the German Patent

Office. If the application meets the requirements of form and content,

the GM is issued without any novelty search and is accompanied by the

publication of an official notice in the German Official Gazette that it

has been so issued. There is no requirement of nonobviousness in order

to obtain a GM, and its purpose is to enable the applicant to obtain a

speedy protection for a new article and if desirable, to concurrently

;

IP te Sor 3

Se TARE. 2: 2 > .

ial PAO oh sa SIRE AEA

On this basis, all parties agree that only that which

is “patented” by a GM may be considered as prior art

under Section 102(b), supra. Subject matter which is an-

cillary to, but not a part of, the patented subject matter

may not be considered. The district court so held. The dis-

agreement between the parties concerns the method of

determining what is “patented” by the Gebrauchsmuster

in question.

The trial court held that a GM “patents” only that

which is disclosed by the bare words of its claims. It re-

lied on language in Reeves, supra, in holding that it is

never permissible to look to the specifications of a GM in

construing its claims. The Reeves court had said: _—— 2

for anticipation purposes under Section 102 a ——

is a reference only for what is patented, t.e., for what it

claims and not, for what is disclosed in its specifications.”

282 F. Supp. at 136.

Defendants maintain that the claims of a GM are to

be construed in light of its specifications and seek to dis-

tinguish Reeves. They note that in Reeves a GM was

cited as a reference against a process patent and that a

GM is by definition a patent only on an article and never

seek a regular patent, a procedure which would consume much more

time. After registration the specifications and claims become available

to the public and anyone has free and open access to the same. The

GM was not a printed publication at any time and is referred to as a

utility model. It is limited to a maximum of six years instead of eighteen

years, covers only articles and never can cover processes as such, and

grants to the inventor the exclusive right to prevent others from making,

using or selling his article and also to recover damages for any in-

fringement. * * *

“By a directive issued to its examiners in 1965, the United States

Patent Office resolved certain prior inconsistent practices as to the

treatment of GMs and stated that GMs may be considered as patents

for anticipation purposes within the purview of Section 102. Official

Gazette of the United States Patent Office, Nov. 2, 1965, Vol. 820,

No. 1.” (Footnote omitted.)

on a process. From this they conclude the Reeves court

ignored the specifications only because they referred to

a process.

However, the Reeves court clearly recognized that an

article patent may in some cases anticipate a process. Such

would be the case where “a Process in one patent can

produce only one article and that article is definitely

covered by what is claimed in another patent [e.g., in an

earlier GM] * * *. [BJut this alone may not be sufficient

to treat the article patent as an anticipation of the process

patent, if many processes are described in the article pat-

ent while only one specific process is described in the

Process patent.” 282 F. Supp. at 136-137.

The patent in suit in Reeves claimed a method of lami-

nating a sheet of plastic foam to a sheet of fabric by the

application of heat from a gas flame. The GM cited

against it claimed a fabric lined foam material with the

fabric bonded directly to the foam. The specifications of

the GM described the process by which the article could

be made indicating the application of heat from heated

rollers, hot gas, infrared light, or high frequency current.

When the language of Reeves is read in light of

these facts, it is clear to us that it calls for neither an

absolute rule that GM specifications may never be re-

sorted to, nor an absolute rule that they may always be

resorted to in interpreting the claims. Rather, it is con-

sistent with our own judgment as to the correct rule. We

conclude that the specifications of a GM may be resorted

to for the purpose of clarifying the meaning of the lan-

guage used in the claims, but may not be resorted to for

the purpose of adding completely new material to that

which is disclosed by the claims.

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For example, in Reeves the GM claims disclosed an e

article which could have been produced by several proc-

esses. The court had held that in such a case the article

patent could not anticipate any one of those processes

when cited against a patent specifically claiming one of

them. Therefore, resort to the specifications there to learn

in what manner the claimed article was actually pro-

duced would have added wholly new matter to the claims.

Without the specifications, the Reeves claims could an-

ticipate no process, but with them, the claims would

anticipate a process as well as an article. Reeves was thus

a paricularly clear case of specifications adding new mat-

ter to what was “patented” by the claims, rather than

simply giving meaning to the words of the claims for the

purpose of determining what was “patented” by them.

Each case will, of course, turn on its own facts, In each

case the question will be “What is ‘patented’?” The speci-

fications of the GM may be resorted to if necessary to

clarify the meaning of the words of the claim — to de-

termine what it is that the claims “patent” but not to add

to what they patent.

Thus, the double question here is whether resort to the

specifications is necessary to determine what is patented

and whether such resort may be taken without increasing

the scope of what is patented.

The claims of the GM cited against the reissue patent

in suit are:

“1, Thread pressing tap for the chipless produc-

tion of inner threads, characterized in that the thread

tap (a) provided with a continuous, 1.e., uninter-

rupted thread along the circumference of its thread

cross section (b, c, d) is undulatingly formed over

its entire length or partly, and, consequently, has

continuous or interrupted depressions (f, f’, f”) ex-

‘

tending longitudinally axially, as well as spirally

axially or otherwise, which though they recede with

respect to the outer circumference (g, g’, g”), never-

theless have the thread extend over their circum-

ferential surface in the profiling of the thread to be

cut and otherwise along the circumference of the tap.

“2. Thread pressing tap for the chipless produc-

tion of inner threads in accordance with claim 1,

characterized by the shape, disposition and arrange-

ment reflected by the drawing and the specification.”

These claims make clear that what is patented is a

swaging tap, 1.e., a “tap for the chipless production of

inner threads.” They also make clear that the patented

tap is of a particular form and shape — one “character-

ized by the shape, disposition and arrangement reflected

by the drawing and the specification.”” However, by this

cross reference, the words of the claims leave unclear

exactly what the “shape, disposition and arrangement”

of the patented article is meant to be. Thus, it is plainly

necessary in this case to resort to the specifications to de-

termine what is “patented”’ by the claims.

It is just as plainly possible to take such resort without

increasing the scope of what is patented by the claims.

The claims clearly profess to patent a particular article

of a particular shape, disposition and arrangement. They

also clearly indicate how such particular shape, disposi-

tion and arrangement is to be determined. Claim 2 is an

obvious incorporation by reference and makes the speci-

fications and drawings as much a part of the claim as

if they were reproduced verbatim in the claim. Without

such an incorporation, Claim 2 would be meaningless.

The trial court completely disregarded Claim 2. It

reasoned that to give it any effect would undermine its

conclusion as to the proper construction of a Gebrauchs-

muster: “Claim | is the only real claim of the GM.

Claim 2 incorporates by cross reference ‘the shape, dis-

position and arrangement reflected by the drawing and

the specification.’ However, to allow such a cross refer-

ence would defeat the limited use which this court has

concluded must be made of the GM.”

We do not agree that allowing the obviously intended

cross reference to the specifications here defeats the limi-

tations to which Gebrauchsmusters are admittedly sub-

ject. We allow such cross reference not to increase the

scope of what is patented by the Gebrauchsmuster claims

but only to accomplish the task at hand of determining

what it is that those claims patent.

The use of GM specifications which we here find prop-

er is fully supported by the German practice. Under that

practice, while claims are frequently used, they are not

required, and the entire specification will be construed in

determining what is patented. The advisory explanations

accompanying the German Regulations regarding ‘‘the

application for Gebrauchsmuster” provide:

“Indication of Novelty.

According to sec. 2 paragraph 2 of the statute, the

application must specify ‘what purpose of work, or

utility, the new form or device is intended to serve.’

Since this indication is of importance for the range

of the legal protection corresponding with the re-

cording, applicant will do well in many cases, even

tho the law does not prescribe the setting of a pro-

tection claim, to summarize separately from the de-

scription, in the type of construction of a patent

claim, the legally protectable characteristics of the

model.” Patents and Gebrauchsmuster in Interna-

tional Law, Emerson Stringham, Pacot Publications,

Madison, Wisconsin, 1935, p. 248.

Stringham comments:

“Scope of protection involves much the same prob-

lems which arise everywhere in patent law. The Ger-

man statute requires no claim for Gebrauchsmuster.

The tendency, during a decade or so, of the Reichs-

gericht to hold itself not bound by the statutory

claim of the long-term patent, finds freer play with

Gebrauchsmuster; * * *.” Jd. at 255.

Having concluded that what is patented by Gebrauchs-

muster Patent 1,455,626 should have been determined by

construing its claims in the light of its specifications

rather than on the bare words of the claims, it becomes

necessary to determine whether that patent, properly con-

strued, does anticipate, and thus invalidate, plaintiff's

Patent Re. 24,572 in suit.

Plaintiff's expert testified, and the district court found,

that on its construction of the GM, the GM lacked sev-

eral elements claimed by plaintiff's reissue patent. The

first element found wanting was a “continuous thread

* * * of substantially equal depth taken in all planes

intersecting the axis of said tool longitudinally thereof

* * *” This element is clearly present when the claims of

the GM are read in light of the specifications and draw-

ings. Claim | of the GM calls for “a continuous, i.e.,

uninterrupted thread along the circumference of [the

tap’s] thread cross section (b, c,d) * * *,” and specifically

notes that the thread continues through the “depressions

(f, f', f°)” of the tool which “have the thread extend over

their circumferential surface in the profiling of the

thread to be cut * * *.” The GM specifications note that

the entire thread shaft is “continuously covered with a

thread which, as far as its profile and its pitch are con-

cerned, is equivalent to the thread to be cut.” Figure 3

desk nen Fee ae - Gad SO Be Ss NE IOS ee

of the GM drawing, reproduced below, clearly shows a

uniform tooth depth.

[Fig. 3 — Not printed]

Two further elements the trial court found wanting in

the GM relate to the tapered end portion of plaintiff's

tap. One element describes the tapered portion and the

second element provides for a continuous thread between

the tapered portion and the cylindrical portion of the

tap. Once again, these elements are clearly disclosed by

the GM, properly construed. Claim | of the GM calls

for an “uninterrupted thread along the circumference of

[the tap’s] thread cross section (b, c,d) * * *.” The re-

quired reference to “(b, c, d)” on the GM drawings

shows that the thread cross section of the GM is indeed

tapered and confirms that the th

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