Crown Machine & Tool Co. v. D & S INDUSTRIES, INC.

• Decision Date: 23 May 1967
• Docket Number: Civ. No. 4942-PHX.
• Citation: 270 F. Supp. 271
• Parties: CROWN MACHINE & TOOL CO., Plaintiff-Counter-Defendant, v. D & S INDUSTRIES, INC. (formerly Thompson Industries, Inc.), Defendant-Counter-Plaintiff.
• Court: U.S. District Court — District of Arizona

270 F. Supp. 271

CROWN MACHINE & TOOL CO., Plaintiff-Counter-Defendant, v. D & S INDUSTRIES, INC. (formerly Thompson Industries, Inc.), Defendant-Counter-Plaintiff.

Civ. No. 4942-PHX.

United States District Court D. Arizona.

May 23, 1967.

COPYRIGHT MATERIAL OMITTED

Edward A. Haight, Haight, Simmons & Hofeldt, Chicago, Ill., Philip E. von Ammon, Fennemore, Craig, Allen & McClennen, Phoenix, Ariz., Alfred H. Plyer, Jr., Parker & Carter, Chicago, Ill., for plaintiff.

Carl Hoppe, James F. Mitchell, Hoppe, Mitchell, Murtha & Anderson, San Francisco, Cal., Thomas E. Parrish, Snell & Wilmer, Phoenix, Ariz., Harris, Kiech, Russell & Kern, Los Angeles, Cal., for defendant.

OPINION

KILKENNY, District Judge:

This is a suit by Crown Machine & Tool Co. (Crown), against Thompson Industries, Inc. (Thompson), whose corporate title is now D & S Industries, Inc., for an accounting of royalties alleged to be due from defendant under an assigned patent license agreement. Defendant counterclaimed, first for declaratory relief, and second for damages under the antitrust laws.¹ The litigation is centered around disposable drinking cups manufactured from expandable polystyrene beads, which, in turn, draws into focus the scope, utility and operating effect of certain patents owned by Crown. Expandable polystyrene beads became generally available in America in 1954. These beads are small plastic particles impregnated with an expanding agent. Upon heating within a closed mold the beads expand and fuse together in a solid light weight plastic article which has the shape of the mold.

Crown, in 1956, decided to manufacture this type of drinking cup, and by December 12, 1957, was distributing the product which was produced by its molding machines. As a result of this experiment, Crown applied for and became the owner of United States Patent 3,162,705 (705), which describes a "Method for Making Plastic Containers" and United States Patent 2,951,260 (260), which contains a detailed analysis of a "Molding Mechanism and Heating Arrangement". The 705 Patent was granted December 22, 1964, as the result of an application made on October 30, 1956. The 260 Patent issued September 6, 1960, was originally applied for on October 1, 1957. Crown is also the owner of United States Patent 3,125,780 (780), which was granted March 24, 1964. That patent describes an "Apparatus and Method for Making Plastic Containers." To commercially exploit the process, Crown entered into negotiations with Champion Papers, Inc. (Champion) and, on July 7, 1958, granted to Champion an exclusive license, whereby the latter could use throughout the United States (with the exception of Texas, Oklahoma and Louisiana) the subject matter disclosed in a group of patent applications, which included the then pending applications for the 260 and 705 Patents. On September 5, 1958, Crown sold Champion the first of several cup molding machines of the type described in the 260 Patent, and Champion began production soon thereafter.

Thompson first entered the picture in late 1959, after observing one of Crown's cups in Phoenix. It became interested in the product and, after encouragement from the Koppers Company of Pittsburgh, a supplier of expandable polystyrene beads, developed a molding machine which would produce drinking cups.

Crown continued to produce and sell foam cups on its machines, for the three-state market exempted from Champion's license until April of 1960, at which time it sold its remaining cup business to Champion. Champion then began designing a new machine for molding cups from expandable polystyrene beads. The development of this "Champion machine" resulted in a patent application by Champion on February 1, 1963, which was honored on August 24, 1965, by the issuance of U. S. Patent 3,202,734 (734).

By late 1961, Thompson and Magi-Cup Corporation of California, with which it had merged, posed a serious competitive threat to Crown and Champion. On December 15, 1961, a Champion vice-president wrote Detweiler, President of Crown, expressing the former's concern about increasing competition.

On July 6, 1962, Crown wrote six concerns, including Thompson, identical letters referring to its 260 Patent, asserting possible infringement. In the ensuing exchange of correspondence between Crown and Thompson, Thompson denied infringement and Crown demanded an inspection of the Thompson machines.

Rather than abating, competition in the foam polystyrene cup industry increased after the warnings sent by Crown in July, and by the fall of 1962 Champion's dominant position in the industry had declined to the point where it had less than 50% of the total sales volume. Under the Crown-Champion license agreement, Crown had the responsibility to enforce the patent rights, and Champion became quite forceful in its demands that more suits be instituted. On October 22, 1962, a Champion officer wrote Crown's president demanding the commencement of an infringement suit against Thompson, among others.

In October of 1962, Crown's counsel received a detailed description of the Thompson molding machine, and in January of 1963 a Crown representative inspected one of the Thompson machines. Conferences between Crown and Thompson proved futile, as Thompson insisted its machines did not infringe on the former's patents.

On August 2, 1963, Champion sold Crown a portion of its polystyrene cup business, and at the same time these two concerns entered into a revised license agreement. By the terms of this agreement, Champion was given the non-exclusive right to use Crown patent rights in the production of cups and containers from expandable plastic materials, and to make and use machines for their manufacture, for a royalty of 2% of the net sales of cups and containers. The royalty obligation, however, extended only to cups and containers covered by claims on any patent among the "Crown patent rights", and to those made on any machine or by any method covered by claims among the "Crown patent rights." Of particular importance to this suit is Section 10 of the agreement, which gave Champion the right to assign or transfer its non-exclusive license in connection with the disposal of its business related to the production of cups and containers from expandable plastics:

"CHAMPION and its subsidiaries shall also have the right to dispose of its business related to the manufacture, use, or sale of cups and containers from expandable plastics under the `CROWN patent rights' and `CHAMPION patent rights' including all or substantially all of the assets of such business, and in connection therewith CHAMPION shall have the right to assign or transfer this license, except that as to said assignee or transferee the license shall be non-transferable, provided that CHAMPION transfers to such party at least a substantial portion of its facilities for said manufacture."

Shortly after the above agreement was executed, Thompson became interested in acquiring a plant in the Eastern United States, and began negotiations with Shield-Ware, Inc., a Champion subsidiary with production facilities in New Jersey. Subsequently, Shield-Ware sold substantially all its assets related to the production of cups and containers from expandable plastics to Thompson on September 9th. In connection with this sale, Champion executed a formal assignment to Thompson of its rights under the above section.

After Thompson had operated the facility, formerly owned by Shield-Ware, for one month, it tendered Crown a royalty check for the cups produced on the Champion machines which were purchased with the plant, in accordance with Champion's contract with Crown. Crown refused the tender, stating that it considered Thompson obligated, under its assignment from Champion, to pay royalties on the production of all its plants, and on any Thompson machines placed in the New Jersey plant. When Thompson refused to pay royalties on any production other than that from the Champion machines, Crown filed this suit.

ISSUES

The specific issues upon which the Court took evidence are as follows:

I. Is Crown entitled to an accounting for royalties on net sales of foam cups manufactured by Thompson on its "Champion" and "Thompson" machines under the provisions of the license agreement?

(a) Is Thompson a licensee of Crown with regard to its manufacture and use of Thompson machines?

(b) Does claim 12 of the 260 Patent cover defendant's Thompson machines?

(c) Do claims 1 and 3 of the 780 Patent, or either of them, cover defendant's Thompson machines?

(d) Does the claim of the 705 Patent cover the method used in operation of defendant's Thompson machines?

(e) Is Crown entitled to enforce the license agreement against Thompson?

II. Has Crown violated the antitrust laws of the United States, specifically 15 U.S.C. §§ 1 and 2, in its obtaining of and its use of the licensed patents?

(a) By its licensing of any or all of the patents upon which it seeks to recover royalties in the complaint; or

(b) By its prosecution in the U. S. Patent Office of any of the applications which matured into the 260, 780 and 705 Patents; or

(c) By bringing action in several Federal Courts for the enforcement of any of the above patents?

III. Is Thompson entitled to a declaratory judgment that none of the claims of the 260, 780 and 705 Patents cover the Thompson machines and that no royalties are due and payable to Crown on account of production of foam cups on such machines or on account of the manufacture and use of Thompson machines?

Crown argues that by becoming its licensee after being charged with infringement, Thompson intended to submit its own machines to the Crown license. I disagree. Crown, in July of 1962, did charge Thompson, and others, with infringement, but Thompson denied infringement then, and has not changed its position. At no time did Thompson desire or request a license to manufacture or operate its own machines.

By February of 1963, Champion had lost...