283 U.S. 163 (1931), 378, Standard Oil Company (Indiana) v. United States

Docket Nº:No. 378
Citation:283 U.S. 163, 51 S.Ct. 421, 75 L.Ed. 926
Party Name:Standard Oil Company (Indiana) v. United States
Case Date:April 13, 1931
Court:United States Supreme Court
 
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283 U.S. 163 (1931)

51 S.Ct. 421, 75 L.Ed. 926

Standard Oil Company (Indiana)

v.

United States

No. 378

United States Supreme Court

April 13, 1931

Argued January 13, 14, 15, 1931

APPEAL FROM THE DISTRICT COURT OF THE UNITED STATES

FOR THE NORTHERN DISTRICT OF ILLINOIS

Syllabus

1. Agreements for interchange of licenses under patents covering processes for the manufacture of an article sold in interstate commerce may be illegal under the Sherman Act if part of a larger plan to control interstate markets or if their necessary effect is to suppress or unduly to restrict competition. They should therefore be closely scrutinized. P. 168.

2. An interchange of patent rights and a division of royalties according to the value attributed by the parties to their respective patent claims is frequently necessary if technical advancement is not to be blocked by threatened litigation, and if the available advantages are open on reasonable terms to all manufacturers desiring to participate,

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such interchange may promote, rather than restrain, competition. P. 170.

3. Unless the industry is dominated, or interstate commerce directly restrained, the Sherman Act does not require cross-licensing patentees to license at reasonable rates others engaged in interstate commerce. P. 172.

4. Three corporations, in the business of producing gasoline and owning patents for "cracking" processes by which the yield of gasoline from crude petroleum is greatly increased, joined with another corporation owning a similar patent in agreements for exchanges of patent rights and division of royalties which were challenged by the government as obnoxious to the Sherman Act, chiefly upon the ground that they enabled the corporations to maintain existing royalties and thereby to restrain interstate commerce.

Held:

(1) That the evidence must be examined to ascertain the operation and effect of the agreements. P. 173.

(2) Since no monopoly or restriction of competition either (a) in the business of licensing patented cracking processes or (b) in the production of either ordinary or cracked gasoline or (c) in the sale of gasoline has been effected either by means of the agreements or otherwise, it is not shown that, by agreeing upon royalty rates, the patentees could control either the price or the supply. Therefore, agreement upon such rates is not a ground for injunction. P. 175.

(3) To warrant an injunction which would invalidate the contracts here in question, and require either new arrangements by the patent owners or settlement of their conflicting claims by litigation, there must be a definite factual showing of illegality. P. 179.

5. Failure of the government to take a cross-appeal from the decree of the district court granting part of the relief sought in this case makes unnecessary a review of findings adverse to the government's contention that the patents were invalid and the cross-licensing agreements made in bad faith. P. 180.

6. In a suit for an injunction under the Sherman Act, questions raised by the government as to validity of agreements between defendants become moot when the agreements are cancelled by the defendants at the request of the district court before entry of the decree. P. 181.

33 F.2d 617 reversed.

Appeal from a decree granting part of the relief sought by the government in a bill charging an illegal combination

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to monopolize and restrain interstate commerce by controlling that part of the supply of gasoline which is produced by the process of " cracking."

BRANDEIS, J., lead opinion

MR. JUSTICE BRANDEIS delivered the opinion of the Court.

This suit was brought by the United States in June, 1924, in the federal court for northern Illinois, to enjoin further violation of § 1 and § 2 of the Sherman Anti-Trust Trust Act July 2, 1890, c. 647, 26 Stat. 209. The violation charged is an illegal combination to create a monopoly and to restrain interstate commerce by controlling that part of the supply of gasoline which is produced by the process of cracking. Control is alleged to be exerted by

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means of seventy-nine contracts concerning patents relating to the cracking art. The parties to the several contracts are named as defendants. Four of them own patents covering their respective cracking processes, and are called the primary defendants. Three of these, the Standard Oil Company of Indiana, the Texas Company, and the Standard Oil Company of New Jersey, are themselves large producers of cracked gasoline. The fourth, Gasoline Products Company, is merely a licensing concern. The remaining forty-six defendants manufacture cracked gasoline under licenses from one or more of the primary defendants. They are called secondary defendants.

Upon the filing of the answers, which denied the violation charged, the case was referred to a special master to take and report the evidence to the court, together with his findings of fact and conclusions of law. Although the Attorney General had filed an expediting certificate1 on February 24, 1925, it was not until January 20, 1930, that the district court entered its final decree. This hearings before the master extended over nearly three years. The evidence, including 327 exhibits, fills more than 4,300 pages of the printed record. The master's report, which occupies 240 pages, is devoted largely to a discussion of the seventy-three patents and seventy-nine license contracts. The master found that the primary defendants had not pooled their patents relating to cracking processes, that they had not monopolized or attempted to monopolize any part of the trade or commerce in gasoline, and that none of the defendants had entered into any combination in restraint of trade. He recommended that the bill be dismissed for want of equity. After a hearing on 273 exceptions filed by the government, the district court granted some of the relief asked. 33 F.2d 617.

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The primary defendants and twenty-five of the secondary defendants appealed to this Court. An order of severance was entered, and the injunction was stayed.

The issues to which most of the evidence was addressed have been eliminated. The violation of the Sherman Act now complained of rests substantially on the making and effect of three contracts entered into by the primary defendants. The history of these agreements may be briefly stated. For about half a century before 1910, gasoline had been manufactured from crude oil exclusively by distillation and condensation at atmospheric pressure. When the demand for gasoline grew rapidly with the widespread use of the automobile, methods for increasing the yield of gasoline from the available crude oil were sought. It had long been known that, from a given quantity of crude, additional oils of high volatility could be produced by "cracking" -- that is, by applying heat and pressure to the residuum after ordinary distillation. But a commercially profitable cracking method and apparatus for manufacturing additional gasoline had not yet been developed. The first such process was perfected by the Indiana [51 S.Ct. 423] Company in 1913, and, for more than seven years, this was the only one practiced in America. During that period, the Indiana Company not only manufactured cracked gasoline an large scale, but also had licensed fifteen independent concerns to use its process, and had collected, prior to January 1, 1921, royalties aggregating $15,057,432.46.

Meanwhile, since the phenomenon of cracking was not controlled by any fundamental patent, other concerns had been working independently to develop commercial processes of their own. Most prominent among these were the three other primary defendants, the Texas Company, the New Jersey Company, and the Gasoline Products Company. Each of these secured numerous patents covering its particular cracking process. Beginning in

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1920, conflict developed among the four companies concerning the validity, scope, and ownership of issued patents. One infringement suit was begun, cross-notices of infringement, antecedent to other suits, were given, and interferences were declared on pending applications in the Patent Office. The primary defendants assert that it was these difficulties which led to their executing the three principal agreements which the United States attacks, and that their sole object was to avoid litigation and losses incident to conflicting patents.

The first contract was executed by the Indiana Company and the Texas Company on August 26, 1921; the second by the Texas Company and Gasoline Products Company on January 26, 1923; the third by the Indiana Company, the Texas Company, and the New Jersey Company, on September 28, 1923. The three agreements differ from one another only slightly in scope and terms. Each primary defendant was released thereby from liability for any past infringement of patents of the others. Each acquired the right to use these patents thereafter in its own process. Each was empowered to extend to independent concerns, licensed under its process, releases from past, and immunity from future claims of infringement of patents controlled by the other primary defendants. And each was to share in some fixed proportion the fees received under these multiple licenses. The royalties to be charged were definitely fixed in the first contract, and minimum sums per barrel, to be divided between the Taxes and Indiana companies, were specified in the second and third. These royalty provisions, and others, will be detailed later.

First. The defendants contend that the agreements assailed relate solely to the issuance of licenses under their respective patents; that the granting of such licenses, like the writing of insurance, New York Life Ins. Co. v. Deer Dodge County, 231 U.S. 495, is not interstate commerce, and that the Sherman Act is therefore inapplicable. This

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contention is unsound. Any agreement...

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