McCoy v. Mitsuboshi Cutlery, Inc., 95-1087

Citation67 F.3d 917,36 USPQ2d 1289
Decision Date04 October 1995
Docket NumberNo. 95-1087,95-1087
Parties, 27 UCC Rep.Serv.2d 1134 Duncan McCOY, Alex Dorsett, and Alex-Duncan Shrimp Chef, Inc., Plaintiffs-Appellees, v. MITSUBOSHI CUTLERY, INC., and Admiral Craft Equipment Corporation, Defendants-Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals for the Federal Circuit

George M. Bishop, George M. Bishop and Associates, Houston, Texas, argued for plaintiffs-appellees. Of counsel were Guy C. Matthews William W. Goodrich, Jr., Arent, Fox, Kintner, Plotkin and Kahn, Washington, DC, argued for defendants-appellants. With him on the brief were Jennifer A. Albert and Marilyn T. Dare.

and J. Albert Riddle, Matthews and Associates, Houston, Texas.

Before MAYER, MICHEL, and RADER, Circuit Judges.

RADER, Circuit Judge.

Duncan McCoy, Alex Dorsett, and Alex-Duncan Shrimp Chef, Inc. (McCoy) sued Mitsuboshi Cutlery, Inc. (Mitsuboshi) and Admiral Craft Equipment Corp. (Admiral Craft) for infringing McCoy's intellectual property rights and committing business torts. McCoy's sales organization had hired Mitsuboshi to make and supply shrimp knives covered by McCoy's patent and trademarks. When Mitsuboshi produced the knives, McCoy refused to pay for them. Mitsuboshi resold the knives to Admiral Craft. McCoy sought damages from Mitsuboshi and Admiral Craft for selling the knives to third parties. Admiral Craft settled with McCoy before trial.

A jury found that Mitsuboshi committed patent and trademark infringement in violation of federal law, tortious interference with McCoy's prospective business relations in violation of Texas law, and unfair competition in violation of federal and Texas law. The jury also found, however, that McCoy breached its contract with Mitsuboshi by refusing to pay for the knives. The trial court then entered judgment awarding McCoy $2.6 million in actual and punitive damages, attorney fees, and costs, plus prejudgment interest. McCoy v. Mitsuboshi Cutlery, Inc., No. H-93-1774 (S.D.Tex. Sept. 19, 1994) (final judgment). The trial court also awarded Mitsuboshi $89,337 on its breach of contract counterclaim. Id. Because Mitsuboshi was entitled to resell the knives in response to McCoy's wrongful refusal to pay, this court reverses.

BACKGROUND

McCoy owns U.S. Patent No. 4,759,126 on a shrimp knife that peels, deveins, and butterflies in one motion. McCoy arranged for Mitsuboshi, a Japanese knife manufacturer, to produce shrimp knives embodying the patented invention. At McCoy's request, Mitsuboshi stamped the knives with McCoy's registered U.S. Trademarks Nos. 1,687,589 and 1,702,878. From 1988 to 1990, Mitsuboshi manufactured and sold large quantities of these knives to McCoy.

In 1991, McCoy's separate marketing organization, A.T.D. Marketing, Inc. (ATD), ordered 150,000 of the knives from Mitsuboshi. Mitsuboshi produced the knives. When Mitsuboshi timely offered the knives, ATD refused to accept or pay for them. ATD's refusal left Mitsuboshi holding the 150,000 knives in its warehouse in Japan. The record contains no suggestion that the knives were defective.

McCoy acknowledged its responsibility for ATD's refusal to pay. McCoy, however, accepted and paid for only about 20,000 of the 150,000 knives ordered. McCoy refused to pay for the other 130,000 knives. On the basis of these facts, the jury found that McCoy breached its contract with Mitsuboshi. McCoy did not appeal this jury verdict.

Following McCoy's partial payment, Mitsuboshi continued to negotiate for payment and delivery of the remaining 130,000 knives. McCoy, however, remained silent, unable to pay for them. In the face of this silence, Mitsuboshi repeatedly notified McCoy of its intent to resell the knives to mitigate damages. At length, Mitsuboshi sold 6,456 of the knives to Admiral Craft, a mail-order wholesaler of restaurant supplies. Admiral Craft sold 958 of the knives in the United States to restaurants and supply houses in 1993 through its mail catalog.

McCoy sued Mitsuboshi and Admiral Craft for patent and trademark infringement, unfair competition in violation of both federal and Texas law, and several Texas state law torts. Admiral Craft settled, but Mitsuboshi persevered, counterclaiming for breach of contract. At the close of evidence, Mitsuboshi moved for judgment as a matter of law that it was entitled to resell the knives. The trial court denied Mitsuboshi's motion. The jury found against Mitsuboshi on the infringement,

unfair competition, and tortious interference counts, and for Mitsuboshi on the breach of contract count. Mitsuboshi then renewed its motion for judgment as a matter of law. The trial court again denied the motion. Mitsuboshi appeals.

DISCUSSION
I.

The jury found, and McCoy does not contest, that McCoy breached its contract with Mitsuboshi. This appeal thus raises the purely legal question of the effect of McCoy's breach on his intellectual property rights in the knives. This court confronts this question for the first time.

A patent confers on its holder the right to exclude others from making, using, or selling what is described in its claims. 35 U.S.C.A. Sec. 154(a)(1) (West Supp.1995); see generally Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1547, 35 USPQ2d 1065, 1070 (Fed.Cir.1995) (en banc). This court has recognized that these intellectual property rights, like any other property rights, are subject to the contractual obligations of their owner and the applicable law:

Th[e] right to exclude may be waived in whole or in part. The conditions of such waiver are subject to patent, contract, antitrust, and any other applicable law, as well as equitable considerations such as are reflected in the law of patent misuse. As in other areas of commerce, private parties may contract as they choose, provided that no law is violated thereby....

Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 703, 24 USPQ2d 1173, 1176 (Fed.Cir.1992) (emphasis added). Thus, a patent or trademark owner may contract to confer a license on another party. See id. (patent); Moore Bus. Forms, Inc. v. Ryu, 960 F.2d 486, 489, 22 USPQ2d 1773, 1774-75 (5th Cir.1992) (trademark). 1 In most instances under contract law, a patent or trademark owner intentionally creates an express license. A licensee, of course, has an affirmative defense to a claim of patent infringement.

In some circumstances, however, the entire course of conduct between a patent or trademark owner and an accused infringer may create an implied license. See Stickle v. Heublein, Inc., 716 F.2d 1550, 1559, 219 USPQ 377, 383 (Fed.Cir.1983). The Supreme Court stated:

Any language used by the owner of the patent or any conduct on his part exhibited to another from which that other may properly infer that the owner consents to his use of the patent in making or using it, or selling it, upon which the other acts, constitutes a license and a defense to an action....

De Forest Radio Tel. Co. v. United States, 273 U.S. 236, 241, 47 S.Ct. 366, 367, 71 L.Ed. 625 (1927). When warranted by such a course of conduct, the law implies a license. Devices for Medicine, Inc. v. Boehl, 822 F.2d 1062, 1068, 3 USPQ2d 1288, 1293-94 (Fed.Cir.1987).

Whether express or implied, a license is a contract "governed by ordinary principles of state contract law." Power Lift, Inc. v. Weatherford Nipple-Up Sys., Inc., 871 F.2d 1082, 1085, 10 USPQ2d 1464, 1466 (Fed.Cir.1989). Moreover the law may imply licenses "to make effective the contracts of the patentee." 6 Ernest B. Lipscomb, III, Libscomb's Walker on Patents Sec. 20:14, at 33 (3d ed. 1987). An implied license, however, must not exceed the limits necessary to make the contract effective. See Waterman v. Mackenzie, 138 U.S. 252, 11 S.Ct. 334, 34 L.Ed. 923 (1891).

To enforce the contracts of the patentee, the law may imply a license where a patent holder sells or authorizes the sale of a patented product--a voluntary sale. See, e.g., United States v. Univis Lens Co., 316 U.S. 241, 250-51, 62 S.Ct. 1088, 1093, 86 L.Ed. 1408, 53 USPQ 404, 408 (1942); Ansul Co. v. Uniroyal, Inc., 448 F.2d 872, 880, 169 USPQ 759, 763-64 (2d Cir.1971), cert. denied, 404 U.S. 1018, 92 S.Ct. 680, 30 L.Ed.2d 666 Patentees ... are entitled to but one royalty for the patented machine, and consequently when a patentee has himself constructed the machine and sold it, or authorized another to construct and sell it, or to construct and use and operate it, and the consideration has been paid to him for the right, he has then to that extent parted with his monopoly, and ceased to have any interest whatever in the machine so sold or so authorized to be constructed and operated.

                172 USPQ 257 (1972).  Thus, "an authorized sale of a patented product places that product beyond the reach of the patent."  Intel Corp. v. ULSI Sys. Technology, Inc., 995 F.2d 1566, 1568, 27 USPQ2d 1136, 1138 (Fed.Cir.1993), cert. denied, --- U.S. ----, 114 S.Ct. 923, 127 L.Ed.2d 216 (1994).  Under this implied license, a patent holder receives a reward for inventive work in the first sale of the patented product.  Univis, 316 U.S. at 251, 62 S.Ct. at 1093.   As the Supreme Court stated
                

Bloomer v. Millinger, 68 U.S. (1 Wall.) 340, 350, 17 L.Ed. 581 (1863).

In some cases, the law implies a license where a patent holder does not authorize the sale of a patented product--an involuntary sale. See, e.g., Wilder v. Kent, 15 F. 217, 219 (C.C.W.D.Pa.1883). For example, in Wilder, the patent holder sued an individual for infringement who purchased a machine at a sheriff's sale. The court dismissed the complaint finding the purchaser had acquired the right to use the patented machine through the purchase at the sheriff's sale. The court reasoned: "To deny to the sheriff's vendee the right to use such machine would in effect prevent its sale upon an execution at law ... and practically withdraw it from the reach of the owner's execution creditors." Id. While appreciating the unique nature of patent rights, the...

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