Business Forms Finishing Service, Inc. v. Carson, 18525.

• Decision Date: 15 October 1971
• Docket Number: No. 18525.,18525.
• Citation: 452 F.2d 70
• Parties: BUSINESS FORMS FINISHING SERVICE, INC., Plaintiff-Appellee, and Raymond P. Glowiak, Counterclaim Defendant-Appellee, v. Palmer A. CARSON and Henry Kovach, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

452 F.2d 70 (1971)

BUSINESS FORMS FINISHING SERVICE, INC., Plaintiff-Appellee, and Raymond P. Glowiak, Counterclaim Defendant-Appellee, v. Palmer A. CARSON and Henry Kovach, Defendants-Appellants.

No. 18525.

United States Court of Appeals, Seventh Circuit.

October 15, 1971.

Francis T. Drumm, Chicago, Ill., for defendants-appellants.

Edward M. Keating, Chicago, Ill., for plaintiff-appellee.

Before DUFFY, Senior Circuit Judge, and STEVENS and SPRECHER, Circuit Judges.

STEVENS, Circuit Judge.

This is the second patent infringement suit that plaintiff has filed against defendants. The first, filed in 1965, was settled on January 10, 1968, when Judge Marovitz entered a consent order reciting that plaintiff's patent¹ was valid but not infringed. Defendants then started to market a somewhat different product, and on September 26, 1968, plaintiff commenced this action which was heard by Judge Napoli. He received no evidence on the issue of validity, holding that as between these parties the validity of the patent had been determined by the prior decree. Judge Napoli also rejected defendants' contention that lack of infringement could be established by proving that the second accused product, though admittedly not identical, was the "equivalent" of the first as a matter of law. After receiving evidence of infringement, on March 5, 1970, he entered judgment in favor of plaintiff and directed an accounting. Defendants have appealed from that judgment. Although subsequent proceedings are discussed in the briefs, they are not properly before us on this appeal.

Both parties rely on the consent decree as creating an estoppel which should control the disposition of this appeal. To explain why we think both are wrong, it will be necessary to discuss the issues of validity and infringement separately. We shall first briefly describe the patented product.

I.

The patent covers a product which makes it feasible to file numbered cards in a random order. The "random filing system" is useful because cards which had been removed temporarily can be refiled simply by placement at the rear of a file drawer without losing the ability to locate them as easily as if they had been filed in numerical order.

The system involves the use of colored tabs which can be affixed to the cards. Each tab is preprinted with a two-digit number, and each decade of tabs uses a different color or design.² The tab color, the position of the tab,³ and the digits all contribute to the ready identification of the last two digits of the number on the file card.⁴

The theory of the system is that it is easier to inspect each card ending with the desired two digits than it is to locate a specific number in a large file drawer; or at least to the extent that time may be lost while inspecting each card with a particular kind of tab, the loss will be more than offset by the time saved when the cards are simply refiled at the back of a drawer in a bunch without the necessity of individual replacement.

Plaintiff's patent does not cover the random filing system. It covers a product. Claim 1 covers a "tab forming card" which, for example, may be a strip containing ten tabs of a given color numbered in sequence from 60 to 69.⁵ Claim 8 covers a "conversion unit" which apparently would include ten sets of strips, each set being of a different color and with a different decade of numbers.⁶ As we understand the claims, the individual tab, which is removed from a strip and applied to a numbered card, is not itself covered by claim 1 or claim 8.⁷

The product is sold by plaintiff in a kit. Each kit contains ten sets of ten strips, a position indicator, and simple instructions which explain the random filing system. The kit is especially useful for a small loan company employing large numbers of loan cards.

Defendants' products are also expressly designed for use in the random filing system. The product challenged in the first suit was not sold in strips of ten tabs, but rather in sheets, each of which contained fifty tabs arranged in five rows. Defendants did not start to market tabs in strips of ten until after the first case was settled. It is the strip form of defendants' product which Judge Napoli found to be infringing in this case.

II.

In order to settle the first litigation, defendants unambiguously agreed to recognize the validity of plaintiff's patent.⁸ In this litigation defendants are in the unattractive position of seeking to repudiate their solemn undertaking while the ink is barely dry.⁹ Understandably, especially since the agreement had been incorporated into a judicial decree, Judge Napoli held that as between the parties the matter of validity had been finally decided.¹⁰ In reviewing that holding, it is quite clear that questions of business ethics must be put to one side. Cf. Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 84 S.Ct. 784, 11 L. Ed.2d 661. We must decide whether, as a matter of contract, the defendants should be held to their bargain, and if not, whether the judicial decree is nevertheless binding.

A.

An undertaking not to challenge the validity of a patent is, in effect, a covenant not to manufacture or sell the patented commodity without the consent of the patentee. It is, therefore, not surprising to find the same competing policy considerations reflected in common law cases dealing with the enforceability of covenants not to compete¹¹ and in Supreme Court decisions limiting and ultimately repudiating the doctrine of licensee estoppel.¹² Although the lines of authority have wavered from time to time, there has been consistent recognition of the fact that the private dispute has ramifications that may affect the public interest in free competition and in the free circulation of ideas. For that reason enforceability cannot be determined without reference to matters beyond the private interests of the litigants.¹³

Under the common law authorities, because of the public interests which are affected, the covenantee has the burden of justifying the restraint on competition. Some covenants, such as those unlimited in time or scope, are flatly condemned; others, if limited and ancillary to a valid business purpose, may be justified as reasonable.¹⁴ Presumably a private agreement between competitors to refrain from challenging a patent may be justified in certain situations, but it seems clear that the burden of justification must rest on the covenantee. As we read the recent decisions of the Supreme Court, which are strikingly unanimous in result as well as reasoning, the desirability of settling a lawsuit would not in itself establish sufficient justification for such an agreement.

In its recent decision in Blonder-Tongue v. University of Illinois Foundation, 402 U.S. 313, 91 S.Ct. 1434, 28 L. Ed.2d 788, the Court relied heavily on the public interest in encouraging tests of patent validity. In the course of its analysis of the relevant economic considerations, the Court stated:

"The tendency of Triplett Triplett v. Lowell, 297 U.S. 638, 56 S.Ct. 645, 80 L.Ed.2d 649 to multiply the opportunities for holders of invalid patents to exact licensing agreements or other settlements from alleged infringers must be considered in the context of other decisions of this Court. Although recognizing the patent system\'s desirable stimulus to invention, we have also viewed the patent as a monopoly which, although sanctioned by law, has the economic consequences attending other monopolies. A patent yielding returns for a device that fails to meet the congressionally imposed criteria of patentability is anomalous.

* * * * * *

"A second group of authorities encourage authoritative testing of patent validity. In 1952, the Court indicated that a manufacturer of a device need not await the filing of an infringement action in order to test the validity of a competitor\'s patent, but may institute his own suit under the Declaratory Judgment Act. Kerotest Mfg. Co. v. C-O-Two Co., 342 U.S. 180, at 185-186 72 S.Ct. 219, at 222, 96 L.Ed. 200. Other decisions of this type involved removal of restrictions on those who would challenge the validity of patents.

"Two Terms ago in Lear, Inc. v. Adkins, 395 U.S. 653 89 S.Ct. 1902 (1969), we relied on both lines of authority to abrogate the doctrine that in a contract action for unpaid patent royalties the licensee of a patent is estopped from proving `that his licensor was demanding royalties for the use of an idea which was in reality a part of the public domain.\' 395 U.S., at 656 89 S.Ct. at 1904. The principle that `federal law requires, that all ideas in general circulation be dedicated to the common good unless they are protected by a valid patent,\' 395 U.S., at 668 89 S.Ct. at 1910, found support in Sears and Compco and the first line of cases discussed above. The holding that licensee estoppel was no longer tenable was rooted in the second line of cases eliminating obstacles to suit by those disposed to challenge the validity of a patent. 395 U. S., at 663-668 89 S.Ct. at 1907-1910. Moreover, as indicated earlier, we relied on practical considerations that patent licensees `may often be the only individuals with enough economic incentive to challenge the patentability of an inventor\'s discovery.\' 395 U. S. at 670 89 S.Ct., at 1911." 402 U.S. at 342-343, 344-345, 91 S.Ct. at 1450-1451.

We believe that the policy considerations which underlie Blonder-Tongue, Lear, Sears and Compco¹⁵ lead inescapably to the conclusion that the defendants' agreement to accept the validity of plaintiff's patent is unenforceable. We so hold.

B.

Plaintiff's estoppel argument rests on more than a private agreement between the parties. In addition, plaintiff claims the benefit of an adjudication because the determination of validity was included in a judicial decree entered after three days of trial in which a genuine issue of validity had been raised.

Although the first case was partially tried, it does not appear...