Beckman Instruments, Inc. v. Technical Develop. Corp., 17835

• Citation: 433 F.2d 55
• Decision Date: 13 October 1970
• Docket Number: No. 17835,17836.,17835
• Parties: BECKMAN INSTRUMENTS, INC., Plaintiff-Appellant (Cross-Appellee), v. TECHNICAL DEVELOPMENT CORPORATION and Franklin F. Offner, Defendants-Appellees (Cross-Appellants).
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

433 F.2d 55 (1970)

BECKMAN INSTRUMENTS, INC., Plaintiff-Appellant (Cross-Appellee), v. TECHNICAL DEVELOPMENT CORPORATION and Franklin F. Offner, Defendants-Appellees (Cross-Appellants).

Nos. 17835, 17836.

United States Court of Appeals, Seventh Circuit.

September 4, 1970.

Rehearing Denied October 13, 1970.

COPYRIGHT MATERIAL OMITTED

M. Hudson Rathburn, Sheldon Karon, Chicago, Ill., for Beckman Instruments.

Myron Lieberman, Edward A. Haight, Chicago, Ill., for Technical Development.

Before SWYGERT, Chief Judge, and CUMMINGS and PELL, Circuit Judges.

SWYGERT, Chief Judge.

This appeal presents important issues concerning the doctrines of patent misuse and licensee estoppel. A statement of the facts is necessary before further elaboration and examination of these issues.

Technical Development Corporation is the exclusive licensee of certain patent rights owned by Franklin F. Offner. On August 8, 1961 Technical entered into a "package" sublicense agreement with Beckman Instruments, Inc. The agreement grants Beckman an exclusive sublicense, covering at its inception twenty-one patents and applications and, in addition, certain applications filed by Offner after August 8, 1961 and the patents issued thereon.

The agreement provides that the payment of royalties by Beckman is to be measured by varying percentages of the gross sales price of "Apparatus Subject to Royalties" manufactured by Beckman. Five categories of apparatus are listed. The first four relate to specific types of biochemical electronic apparatus. The fifth includes all apparatus other than those described in the first four categories which are covered by any patent or application sublicensed under the agreement. A ceiling of five million dollars in royalties is stipulated. When payments to Technical reach this ceiling the sublicense becomes fully paid and irrevocable. Unless sooner terminated, the agreement extends to the date when the last sublicensed patent expires. Prior termination of a sublicense of any patent covered by the agreement is permitted if Beckman does not make use of the patent and advises Technical in writing that it has no wish to use such patent or engage in such field of use in the future.

In December 1965 Patent No. 3,225,305 was issued on an application filed by Offner in January 1962 covering an alleged invention of a transistorized differential amplifier. By the terms of the licensing agreement the '305 patent became sublicensed to Beckman. Beckman refused, however, to pay royalties on the apparatus covered by the patent. The refusal precipitated a demand by Technical for arbitration under the terms of the agreement. Beckman thereupon filed its complaint in the instant case, challenging the validity of the '305 patent and the legality of the sublicensing agreement.

The district court granted summary judgment for defendants on Beckman's claim challenging the validity of the '305 patent. The court relied solely upon the doctrine of licensee estoppel. In addition, the district court dismissed Beckman's claim that the sublicense agreement was illegal, holding that the charges of patent misuse failed to state a claim upon which relief could be granted or failed to state an actual controversy. The district court also vacated its prior order staying all judicial proceedings pending completion of arbitration and entered an order restraining arbitration during the pendency of this appeal. Beckman appeals from the summary judgment with respect to the '305 patent and the dismissal of its claim challenging the legality of the licensing agreement. Defendants cross-appeal from the district court's refusal to stay this proceeding pending arbitration.

We reverse the summary judgment and affirm the refusal to stay this proceeding pending arbitration. The dismissal of plaintiff's challenge to the legality of the sublicense agreement is reversed in part and affirmed in part.

I

In Count I of the complaint, Beckman seeks a declaration of invalidity, noninfringement, and unenforceability with respect to the '305 patent. The plaintiff alleges fraud in the procurement of the patent and also noncompliance with sections 102, 103, and 105, Title 35 of the United States Code.

The district court, relying on the licensee estoppel doctrine, granted defendants' motion for summary judgment. Two months later the Supreme Court overruled this doctrine in Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969). Relying on the supremacy of federal patent policy over state contract law, the Court held that the public interest in encouraging challenges to invalid patents requires that licensees be allowed to challenge patent validity and escape payment of royalties. The link between the need for challenge and the remedy of abolishing licensee estoppel was provided by the Court's holding that: "Licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor's discovery. If they are muzzled, the public may continually be required to pay tribute to would-be monopolists without need or justification." 395 U.S. at 670, 89 S.Ct. at 1911.

Defendants attempt to avoid the impact of the Lear decision by arguing that the rule announced in that case should be limited to nonexclusive licenses and that the doctrine of licensee estoppel should still apply to exclusive licensees such as Beckman. It is true that the license involved in Lear became nonexclusive prior to the filing of suit, see Adkins v. Lear, Inc., Cal.App., 52 Cal.Rptr. 795, 806 (1966), but nowhere in the Supreme Court's opinion is this fact mentioned. Defendants suggest that this was mere oversight on the part of the Court, and that in fact the basic rationale of Lear is inapplicable to exclusive licensees because outsiders also have a strong economic incentive to challenge the monopoly granted the exclusive licensee. In the case of nonexclusive licenses, defendants argue, all would-be competitors are free to become licensees, and henceforth would be barred from challenging the patent unless a limited exception to the doctrine of licensee estoppel were made.

We reject the argument. Even if the failure to distinguish between exclusive and nonexclusive licenses was oversight, we are not convinced that the Supreme Court would rule differently on the facts of this case. Nor can we say that the distinction which the defendants suggest is so great as to require a limitation on the Lear rule, especially in light of the "strong federal policy favoring free competition in ideas which do not merit patent protection." Lear, Inc. v. Adkins, supra, 395 U.S. at 656, 89 S.Ct. at 1904.

Defendants also argue that an exclusive licensee enjoys a monopoly unavailable to a nonexclusive licensee and, having gotten his bargain, should not be allowed to escape royalty payments, especially when the patentee is prevented from licensing to others. But, as plaintiff correctly points out, the whole purpose of this suit is to show that Offner in fact invented nothing and that plaintiff was paying for the use of unpatentable ideas. Moreover, substantially similar arguments as the defendants make were rejected by the Court in Lear. There the Court said:

Surely the equities of the licensor do not weigh very heavily when they are balanced against the important public interest in permitting full and free competition in the use of ideas which are in reality a part of the public domain. * * * We think it plain that the technical requirements of contract doctrine must give way before the demands of the public interest. 395 U.S. at 670, 89 S.Ct. at 1911.

Defendants' next contention is that the doctrine of estoppel by marking was not necessarily overruled or disapproved by the Lear case. Plaintiff concedes that, at Offner's request, it placed the number of the '305 patent on certain of its products during most of the year 1966. Although the district court declined to rule on this point, basing its grant of summary judgment entirely upon the doctrine of licensee estoppel, we hold as a matter of law that licensees are no longer estopped to challenge the validity of a licensed patent merely because they have marked their products with the patent number.

Defendants attempt to distinguish the doctrines of licensee estoppel and estoppel by marking by suggesting that the former is based on principles of contract law, while the latter has its basis in equity. But defendants' arguments in support of each of these doctrines sound very similar, namely, that it is unfair for licensees to use the patent and accept the benefits of the license and then attack the validity of the patent. However, the Supreme Court in Lear rejected such arguments when applied to the licensee estoppel doctrine, and we think the Court's reasoning extends to the doctrine of estoppel by marking as well. Defendants have not suggested any reason why the "strong federal policy" in favor of encouraging challenges to invalid patents should not apply when there has been marking with the patent number. Perhaps it is true that such marking provides the licensee with additional protection from competitors, thus making it seem all the more unfair to allow him to repudiate his obligations. However, it must be noted that the Supreme Court in Lear conceded that patent invalidity does not amount to total failure of consideration, but nonetheless held that patent invalidity must be made a complete defense to the obligation to pay royalties. We cannot say that the additional consideration or "benefit" flowing to the licensee who marks his products with the patent number is sufficient to make the Lear case and its policy rationale inapplicable.

II

Count II of the amended complaint charges defendants with five separate forms of patent misuse through various provisions of the sublicensing agreement: first, requiring payment of royalties based on plaintiff's gross sales, including the sale of apparatus not...