A. & E. Plastik Pak Co. v. Monsanto Company

• Decision Date: 05 June 1968
• Docket Number: No. 21420.,21420.
• Citation: 396 F.2d 710
• Parties: A. & E. PLASTIK PAK CO., Inc., Appellant, v. MONSANTO COMPANY, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

396 F.2d 710 (1968)

A. & E. PLASTIK PAK CO., Inc., Appellant, v. MONSANTO COMPANY, Appellee.

No. 21420.

United States Court of Appeals Ninth Circuit.

June 5, 1968.

COPYRIGHT MATERIAL OMITTED

Jack Corinblit (argued), Los Angeles, Cal., Meyer Berkowitz, Beverly Hills, Cal., for appellant.

Gordon F. Hampton (argued), Don T. Hibner, Jr., of Sheppard, Mullin, Richter & Hampton, Los Angeles, Cal., A. Donham Owen of Owen, Wickersham & Erickson, San Francisco, Cal., for appellee.

Before CHAMBERS and MERRILL, Circuit Judges, and SOLOMON, District Judge.

MERRILL, Circuit Judge:

This appeal is taken pursuant to 28 U.S.C. § 1292(a) (1), from an interlocutory order denying a temporary injunction.

Background

Until December 3, 1963, Monsanto held a patent on an extremely clear, durable type of plastic sheet known as "biaxially oriented polystyrene sheet" and, in the trade, called "OPS". It remains the major U. S. supplier of this sheet. Soon after the expiration of its patent, A. & E., a producer of finished products from this type of plastic sheet, began attempts to develop a plant to make OPS for itself, using information disclosed by the patent.

In April, 1964, A. & E. hired away from Monsanto one of the latter's engineers, Merlin Evans, who had worked for Monsanto since graduation from college seven years earlier. In the course of his employment he had been intimately involved in OPS research and development and had had full access to Monsanto's latest technology in this field. Monsanto held an employment contract with Evans under which he had agreed never to disclose "any secret or confidential information or matter of the company." Monsanto, fearing that Evans would disclose confidential technology to A. & E., wrote A. & E. warning that it would take legal action if such information were used by A. & E. in setting up its OPS process.

A. & E. thereupon suspended installation of the sheet process in its plant and efforts were begun to settle the issue. On December 22, 1964, a written agreement was entered into by which Monsanto granted A. & E. a license to use its technology as known to Evans, apparently to the extent necessary to provide OPS for use in the manufacture of thermoformed articles. A. & E. agreed to pay royalties for a period of ten years. Evans was released from his obligation of secrecy.

Apparently for the purpose of allowing A. & E. the economies of large-scale production while refraining from competition with Monsanto in the sale of the sheet itself, the agreement also provided that Monsanto would purchase from A. & E. five million pounds of OPS over the first three years after its production was begun by A. & E. The exact terms of this agreement were not specified and the parties were unable subsequently to agree upon further clarification. In September, 1965, A. & E. notified Monsanto that it was prepared to deliver sheet pursuant to the terms of the agreement. Monsanto then repudiated its obligation to purchase and A. & E. thereupon began sale of the sheet on the open market in competition with Monsanto.

The agreement between the parties provided for arbitration of all disputes "arising out of or relating to" the agreement. On March 4, 1966, Monsanto served a demand for arbitration of the following issues: (1) whether A. & E. had breached its licensing agreement with Monsanto, and (2) whether Monsanto was justified in repudiating its commitment to purchase five million pounds of OPS from A. & E. An answering statement filed by A. & E. presented as issues: (1) whether it had agreed not to sell the OPS it produced to third parties, and (2) whether trade secrets or "know-how" existed which could be imparted to it by Merlin Evans and form the subject of a valid license.

While A. & E. initially appeared to accept arbitration, and participated in the selection of arbitrators, on June 27, 1966, just before arbitration was to begin, it filed this suit in the District Court for the Central District of California claiming that if the agreement were construed as Monsanto wished it to be it would violate the Sherman Act as an attempt to monopolize the market in OPS and restrain trade in that product. As relief it sought, in part, permanent and temporary injunctions enjoining Monsanto from proceeding with arbitration.

Upon motion of A. & E. the District Court entered its order denying temporary injunction. It is from this order that appeal is taken.

Motion to dismiss

At the outset we are faced with Monsanto's motion to dismiss the appeal for lack of appellate jurisdiction. Monsanto contends that the order denying a temporary injunction is not an appealable order under 28 U.S.C. § 1292(a) (1);¹ that it was not in truth an injunction which was sought but a "stay" of arbitration; and that the order was a mere step in the controlling of litigation before the court. In support of its contention Monsanto relies upon Lummus Co. v. Commonwealth Oil Refining Co., 297 F.2d 80 (2d Cir. 1961), cert. denied, Dawson v. Lummus Co., 368 U.S. 986, 82 S.Ct. 601, 7 L.Ed.2d 524 (1962).

We cannot agree. This is not a case of a court's staying or refusing to stay its own hand in deference to proceedings going forward in another forum.² The order was not an exercise by a court of its inherent power to control its own proceedings. Here the court was asked (and declined) affirmatively to interfere with proceedings in another forum; to exercise its equity powers to halt action of its litigants outside of its own court proceedings — the classic form of injunction. That arbitration is not a mere extension of court proceedings but involves a separate tribunal seems clear from Bernhardt v. Polygraph Co. of America, 350 U.S. 198, 202-203, 76 S.Ct. 273, 100 L.Ed. 199 (1956).

The motion to dismiss is denied.

Merits of the appeal

The essence of A. & E.'s complaint of a Sherman Act violation is set forth in paragraph V(a) of its first cause of action:

"MONSANTO attempted to extend its patent monopoly, although the patent had already expired, by asserting in bad faith as against any potential competitor who employed MONSANTO personnel, including A. & E., that what had in fact been a patented machine or process was now a `trade secret\'. This assertion by MONSANTO was in bad faith for the purpose of frightening and eliminating any competition in the manufacture of OPS because MONSANTO knew that all of the elements of the manufacture of OPS were disclosed in Patent No. 2,412,187, or were the subject of engineering skill which was not capable of and was not in fact the subject of proprietary ownership by MONSANTO."

Further, A. & E. specifies as an antitrust violation the very promise on which Monsanto seeks arbitration: the alleged promise of A. & E. not to compete in public sales of OPS.³

Upon this appeal the question is whether, considering the underlying nature of the controversy, it was abuse of discretion for the District Court, by refusing to grant the requested injunction, to defer to resolution of factual disputes by the arbitration forum. A. & E.'s contentions in asserting abuse of discretion may be stated as follows:

1. That the contract upon its face is invalid under the Sherman Act and that this invalidity voids the agreement to arbitrate.

2. That if issues remain to be decided upon which the validity of the contract will depend these issues are for the court and not the arbitration panel.

3. That in any event where the existence of a valid arbitration agreement is in dispute this issue should have precedence and should be first resolved before resort is had to arbitration.

We deal with these contentions in order.⁴

1. Validity of the contract on its face

In Ring v. Spina, 148 F.2d 647, 160 A.L.R. 371 (2d Cir. 1945), it was held that where price fixing, a per se violation of the antitrust laws, appeared prima facie from the face of the agreement no purpose would be served by arbitration until a District Court determination of its validity had first been had. The court stated at page 650:

"We think we must hold that there is showing prima facie, of an agreement in restraint of trade * * *."

The agreement between Monsanto and A. & E., on its face, appears to be a license of technology or "know-how,"⁵ to which restraints of competition are attached as conditions of the license. Thus, on its face, it does not appear to be an agreement between competitors not to compete, for absent the licensed know-how, A. & E. is in no position to compete.

The holder of a patent can validly license it to others on the condition that they use it only for certain purposes. General Talking Pictures Corp. v. Western Electric Co., 305 U.S. 124, 59 S.Ct. 116, 83 L.Ed. 81 (1938). A patent is a legal monopoly and any waiver of the monopoly expands rather than diminishes its availability to the public.

To a certain extent the same is true of the licensing of trade secrets or know-how. Know-how, unlike a patent, confers upon the one who enjoys it no universal power to exclude others and its value is gone when the technology it encompasses is gained by the experience of others. However, "it confers upon its possessor the exclusive, although perhaps temporary, right to utilize it." MacDonald, Know-How Licensing and the Antitrust Laws, 62 Mich. L.Rev. 351, 354 (1964). As to the imposition of restraints as a condition to know-how licensing, the author of the above article concludes:

"* * * so long as restraints are imposed solely upon those know-how licensees who have not discovered and cannot easily obtain the technology for themselves, the restraints should be valid, if reasonable. To the uninitiated licensee, at least, the know-how which is granted is figuratively a type of `property,\' and the restraints imposed on him are less burdensome than the competitive disability posed by his unfamiliarity with the secret techniques.

* * * the license itself, like a patent license, is a partial release of a monopoly position rather than the

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