American Optical Co. v. New Jersey Optical Co., Civil Action No. 1583.

• Decision Date: 09 July 1943
• Docket Number: Civil Action No. 1583.
• Citation: 50 F. Supp. 806
• Parties: AMERICAN OPTICAL CO. v. NEW JERSEY OPTICAL CO. (UNITED STATES, Intervener).
• Court: U.S. District Court — District of Massachusetts

50 F. Supp. 806

AMERICAN OPTICAL CO. v. NEW JERSEY OPTICAL CO. (UNITED STATES, Intervener).

Civil Action No. 1583.

District Court, D. Massachusetts.

July 9, 1943.

Brooks Potter, John L. Hall, Frederick H. Nash, Mercien Jenckes, and Harrison F. Lyman, all of Boston, Mass., for plaintiff.

Charles B. Rugg and Edward B. Hanify, both of Boston, Mass., and Daniel V. Mahoney and Morris D. Jackson, both of New York City, for defendant.

Samuel S. Isseks and Irving B. Glickfield, Sp. Assts. to Atty. Gen., and Melville C. Williams, Sp. Atty., of New York City, for the Government, intervenor.

HEALEY, District Judge.

This action was commenced in the Municipal Court of the City of Boston to recover unpaid royalties under license and sublicense agreements, copies of which are annexed to the declaration as Exhibits A, B and C. Exhibits A and B are sublicense agreements which recite that the licensor (plaintiff) is the exclusive licensee under certain United States Patents. The agreements grant to the sublicensee a non-exclusive license to make, use and sell the inventions covered by the patents involved. The licensor reserved the right to determine and fix prices, sales plans and terms. Licensee agreed to pay certain royalties. The licensee acknowledged the validity of the patents and agreed not to contest their validity. Exhibit C is a simple license agreement under certain other patents of which the plaintiff is recited to be the owner. There are no price-fixing provisions in Exhibit C.

The defendant removed the case to this Court, and filed an answer alleging, inter alia, the invalidity of the license and sublicense agreements as part of a conspiracy unlawfully to monopolize and restrain trade and commerce among the several states and with foreign countries in the manufacture and sale of optical goods, in violation of Sections 1 and 2 of the Sherman Act, 15 U. S.C.A. §§ 1, 2. Defendant also filed a counterclaim for treble damages.

After the United States Supreme Court had rendered its decision in Sola Electric Company v. Jefferson Electric Company on December 7, 1942, 317 U.S. 173, 63 S. Ct. 172, 87 L.Ed. ___, the defendant filed the motion with which we are now concerned. By this motion, defendant seeks to amend its answer and counterclaim by attacking the validity of the patents themselves, and seeking a declaratory judgment that the patents are invalid.

In Sola Electric Company v. Jefferson Electric Company, supra, the respondent had brought suit in the District Court for the Northern District of Illinois to recover unpaid royalties under an agreement granting petitioner a non-exclusive license to manufacture and sell certain transformers, the patent for which respondent owned. Respondent also sought an injunction restraining further sales except in conformity with the terms of the license agreement. The license agreement contained a price-fixing clause. The petitioner, in its answer, attacked the validity of certain broad claims of the patent. By counterclaim, the petitioner alleged that the broad claims were invalid for want of novelty, and that respondent by reason of the price control provisions of the licensing contract and the invalidity of the broad claims was not entitled to recover royalties upon those transformers covered only by the broad claims. Petitioner accordingly prayed for a declaratory judgment that the broad claims were invalid, and for other relief. The District Court ordered the counterclaim dismissed on the grounds that the petitioner, having accepted a license under the patent, was estopped to deny its validity. The Circuit Court of Appeals affirmed the order of the District Court. 7 Cir., 125 F.2d 322. The Supreme Court of the United States granted certiorari. 316 U.S. 652, 62 S.Ct. 946, 86 L. Ed. 1733. In reversing the decision of the Circuit Court of Appeals, the Court held that a patent licensee is not estopped by virtue of his license agreement to challenge a price-fixing clause in the agreement by showing that the patent is invalid, and that the price restriction is accordingly unlawful because not protected by the patent monopoly.

Plaintiff's counsel has attempted to distinguish the instant case from the Sola case by stating that the Supreme Court, in the Sola case, merely held that a licensee is not estopped to deny the validity of the patent for the purpose of showing that the price-fixing clause is invalid. Plaintiff contends that the Court did not hold that the defendant was not estopped from denying the validity of a patent for the purpose of defending an action for royalties under a license agreement which contains a price-fixing clause. I am of the opinion that the Supreme Court intended no such distinction. The action was brought for the purpose of recovering royalties as well as for the purpose of enforcing the price-fixing clause. A reading of the Court's opinion in the Sola case as a whole indicates that one of the issues involved is whether or not a licensee is estopped from setting up as a defense to a suit for royalties the invalidity of the patents for want of novelty where the license agreement contains a price-fixing clause. This the Supreme Court decided in the negative. An illegal price-fixing clause may so permeate the whole contract as to render the entire agreement violative of the Sherman Act, 15 U.S.C.A. §§ 1-7, 15 note. Consequently, local rules of estoppel "must yield to the Act's declaration that such agreements are unlawful, and to the public policy of the Act which in the public interest precludes the enforcement of such unlawful agreements." 317 U.S. 174, 63 S.Ct. 174, 87 L.Ed. ___.

The plaintiff points out that in two of the contracts in issue, Exhibits A and B, there are express covenants by the defendant that it will not contest the validity of the patents under which it is licensed. In the Sola case, the claimed estoppel was based on the licensee's implied obligation not to contest the validity of the patent involved. In the instant case, the plaintiff relies also on the express covenant. I believe, as did the United States Circuit Court of Appeals for the Second Circuit in American Cutting Alloys, Inc., v. General Electric Company, 135 F.2d 502, 505, decided May 3, 1943, that "if this difference has any significance, it should militate against rather than in favor of estoppel."

Plaintiff's next point is that, since one of the contracts, Exhibit C, has no price-fixing clause, the validity of the patents there involved may not be attacked. However, defendant by its proposed amended answer alleges that on devices made under the contract, Exhibit C, defendant is required to pay the royalties and to observe the price-fixing and other restrictive terms of Exhibit A. In other words, according to defendant's proposed allegation,...