Wallace Clark & Co., Inc. v. Acheson Industries, Inc.

CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
Citation394 F. Supp. 393
Docket NumberNo. 74 Civ. 2812.,74 Civ. 2812.
PartiesWALLACE CLARK & COMPANY, INC., Plaintiff, v. ACHESON INDUSTRIES, INC., Defendant.
Decision Date28 April 1975

Sandoe, Hopgood & Calimafde, New York City, for plaintiff; Paul H. Blaustein, New York City, of counsel.

Pennie & Edmonds, New York City, for defendant; James G. Foley, New York City, Harness, Dickey & Pierce, Michael Dinnin, Jr., Birmingham, Mich., of counsel.

OPINION

EDWARD WEINFELD, District Judge.

This is the second action instituted in this court by plaintiff, Wallace Clark & Company, Inc. ("Wallace Clark"), against the defendant, Acheson Industries, Inc. ("Acheson"), involving the validity and infringement of patent No. 2,976,257 issued to and owned by Acheson. The first action was instituted by plaintiff in December 1971 for a declaratory judgment of invalidity of defendant's patent and its non-infringement by plaintiff's manufacture, use and sale of its product Meta-Tef 530. Acheson counterclaimed, charging plaintiff with patent infringement. After pretrial discovery procedures the case moved forward to trial; however, it was never tried. The parties entered into a consent decree wherein Acheson's patent was held both valid and infringed by plaintiff's product Meta-Tef 530. Coincidental thereto, the parties executed a non-exclusive licensing agreement under which Wallace Clark is licensed to manufacture and sell certain products under the claims of Acheson's patent with royalty payments determined on a percentage basis with a fixed minimum. The license is coterminous with the patent; both expire on March 21, 1978. Pursuant to the agreement, the consent decree was submitted to and duly signed on October 6, 1972 by Judge Cannella, to whom the matter had been assigned. The decree provided for the dismissal of the action with each party to bear its own costs and attorneys' fees.

Plaintiff made the payments required under the license agreement until January 1, 1974, when it discontinued making further payments. Thereupon, in April 1974, Acheson filed an action in Michigan state court against Wallace Clark for breach of the licensing agreement. Wallace Clark counterclaimed for a declaratory judgment that it had the right to contest validity of the Acheson patent and also to allege invalidity and non-infringement as a defense to Acheson's suit to recover royalty payments; it also asserted as a defense patent misuse, claiming that the minimum royalty clause is an illegal extension of the patent. In addition, Wallace Clark counterclaimed for treble damages under section 1 of the Sherman Act1 based upon the provision in the license agreement that it may not be terminated during the life of the patent. Within two months thereafter, in June 1974, Wallace Clark instituted this action, the second in this court, for a declaratory judgment asserting substantially the same claims advanced as defenses and counterclaims in the Michigan action.2

Wallace Clark now moves to be relieved of the terms of the consent decree under Rule 60(b)(5) of the Federal Rules of Civil Procedure on the ground that "it is no longer equitable that the judgment should have prospective application," and under Rule 60(b)(6) for "other reasons justifying relief from the operation of the judgment." While it seeks relief under the foregoing rule, actually its motion is for summary judgment to determine the res judicata effect of the consent decree considered in light of the Supreme Court's ruling in Lear, Inc. v. Adkins.3 Wallace Clark's request for relief is miscast under Rule 60(b)(5) or (6) since it entered into the consent decree three years after the Supreme Court's decision in Lear on June 16, 1969. Presumably the parties to the lawsuit, represented by the same experienced patent attorneys who now appear on their behalf, were not unfamiliar with its holding.4 Acheson agrees the issue is one of law and that the matter is ripe for disposition. Accordingly, we turn to the merits of plaintiff's claim for relief under the summary judgment rule.5

I
A.

Plaintiff, in reliance upon Lear, seeks to avoid any res judicata effect of the consent decree. Under the general rule that a consent judgment has res judicata effect,6 plaintiff would be estopped from contesting the validity of Acheson's patent and that its Meta-Tef 530 product infringes thereon. However, Wallace Clark contends that the decree should not be accorded res judicata effect in light of the public policy against invalid patent monopolies. Thus, the issue to be determined is the res judicata effect of the consent decree in subsequent litigation between the same parties presenting the same issues of validity and infringement as in the prior action.

B.

Since plaintiff's principal reliance in support of its position is on Lear, it is desirable to consider the facts upon which Lear was grounded, its precise holding and its underlying rationale.

Adkins, an inventor, was hired by Lear, Inc. in January 1952 to help solve gyroscope problems encountered by Lear in its work in the aviation field. They entered into a preliminary agreement which provided that all new ideas, discoveries and inventions related to vertical gyros became the property of Adkins; in turn, he agreed to grant Lear a license as to all ideas he developed on a mutually satisfactory royalty basis. Adkins soon developed an improved gyroscope which Lear incorporated into its production process. In February 1954, Adkins filed an application with the Patent Office to protect his improvements, and at about the same time entered into negotiations with Lear for licensing and royalty arrangements. These negotiations were concluded in September 1955 in an agreement which defined the conditions under which Lear California gyros used his patent and that claiming that both the Michigan and was obligated to pay royalties for Adkins' improvements. This agreement provided that if the Patent Office refused to grant a patent on Adkins' pending application, or if a patent were issued and latter declared invalid, Lear had the option to terminate the specific license so affected or to terminate the entire agreement.

Adkins' patent application was not granted until 1960, only after he had narrowed the scope of his claims following rejection of his original broad claim that his entire method of constructing gyroscopes was entitled to a patent monopoly. From the filing by Adkins of his original application in 1954 to the grant of his patent in 1960, Lear questioned that Adkins was entitled to receive a patent. In 1957, after Adkins' patent applications had been rejected twice, Lear contended that a Patent Office search disclosed a prior patent which had fully antedated Adkins' discovery. Lear then refused to pay royalties any longer on gyroscopes produced at its Michigan plant, which it claimed it had developed independently, although it continued to pay royalties on those produced at its California plant until 1959.

When Adkins obtained his patent in 1960, he brought suit against Lear Lear's failure to pay royalties on those gyros was a breach both of the 1955 contract and Lear's quasi-contractual obligation. Lear sought to raise patent invalidity as a defense, but the trial judge directed a verdict in favor of Adkins on the California gyros, holding that Lear was estopped by the licensing agreement from questioning Adkins' patent. Following an intermediate appeal, the case reached the California Supreme Court, which held that

"one of the oldest doctrines in the field of patent law establishes that so long as a licensee is operating under a license agreement he is estopped to deny the validity of his licensor's patent in a suit for royalties under the agreement. The theory underlying this doctrine is that a licensee should not be permitted to enjoy the benefit afforded by the agreement while simultaneously urging that the patent which forms the basis of the agreement is void."7

The court found that the 1955 agreement between Adkins and Lear was in effect and concluded that under the doctrine of licensee estoppel, Lear was barred from challenging the validity of Adkins' patent.

The Supreme Court recognized that when it last considered the doctrine in Automatic Radio Manufacturing Co. v. Hazeltine Research, Inc.,8 it, like the California Supreme Court, had invoked estoppel to deny a licensee the right to prove that his licensor was demanding royalties for the use of an idea which was not validly patented and thus a part of the public domain. Certiorari was granted "to reconsider the validity of the Hazeltine rule in the light of . . . recent decisions emphasizing the strong federal policy favoring free competition in ideas which do not merit patent protection."9

In considering this issue, Mr. Justice Harlan reviewed in detail the Supreme Court, intermediate federal and state court cases which had carved out various exceptions to the "general rule" of licensee estoppel, and observed that the exceptions had all but eroded the estoppel doctrine in patent licensing agreements. Thus, he concluded:

"The uncertain status of licensee estoppel in the case law is a product of judicial efforts to accommodate 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 common good unless they are protected by a valid patent. citations omitted 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
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