Cataphote Corporation v. DeSoto Chemical Coatings, Inc.

• Decision Date: 17 January 1972
• Docket Number: No. 25118.,25118.
• Citation: 450 F.2d 769
• Parties: CATAPHOTE CORPORATION, Plaintiff-Appellee, v. DeSOTO CHEMICAL COATINGS, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

450 F.2d 769 (1971)

CATAPHOTE CORPORATION, Plaintiff-Appellee, v. DeSOTO CHEMICAL COATINGS, INC., Defendant-Appellant.

No. 25118.

United States Court of Appeals, Ninth Circuit.

November 4, 1971.

Rehearing Denied January 17, 1972.

Carl Hoppe (argued), of Eckhoff & Hoppe, San Francisco, Cal., Dugald S. McDougall, of McDougall, Hersh, Scott & Ladd, Chicago, Ill., for defendant-appellant.

George B. Collins (argued), William A. Marshall (argued), of Merriam, Marshall, Shapiro & Klose, Chicago, Ill., for plaintiff-appellee.

Before MERRILL and CHOY, Circuit Judges, and POWELL,^* District Judge.

CHOY, Circuit Judge:

Cataphote Corporation (Cataphote), DeSoto Chemical Coatings, Inc. (DeSoto), and Perma-Line Manufacturing Corporation of America (Perma-Line) manufacture and sell thermoplastic pavement-marking compositions used principally for highway traffic lane markings.¹ In 1962, Cataphote sued DeSoto, alleging infringement of Cataphote's patent for a thermoplastic composition (the Poole patent). DeSoto counterclaimed, alleging that Cataphote unilaterally and in concert with Perma-Line, a licensee under the Poole patent, violated Sherman Act §§ 1 and 2, 15 U.S.C. §§ 1 and 2.²

The District Court separated the issues, stayed the counterclaim, and without a jury tried the patent infringement claim, holding for DeSoto on the ground that the Poole patent was invalid because it had been placed in public use and sale more than one year prior to the patent application, 235 F.Supp. 936 (N.D.Cal. 1964). We affirmed. 356 F.2d 24 (9th Cir. 1966) (Cataphote I).

After trial, again without a jury, on the antitrust counterclaim, the District Court entered judgment for Cataphote and Perma-Line, holding that (1) Cataphote did not knowingly and willfully misrepresent to the Patent Office that the invention disclosed in its application had not been in public use for more than one year prior to the filing of the original application, nor had it knowingly and willfully misrepresented that Poole was the inventor ; and (2) Cataphote and Perma-Line did not enter into their licensing agreement for the purpose of prosecuting an infringement action against DeSoto in furtherance of a scheme to violate the antitrust laws. DeSoto appeals. We affirm.

1. The Facts

In September 1955, Cataphote hired Arthur D. Little, Inc., to develop a substance to mark highways which would prove more durable than paint. John A. Poole, a Little employee and the nominal patentee, developed the composition for which Cataphote eventually received a patent on May 29, 1962. The patent application filed November 12, 1957, contained, under oath, the assertions that the invention had not been in public use or sale for more than one year preceding the application, and that Poole was the inventor. While Poole had invented the composition having a styrene resin binder which was covered by the original application, the application was amended to substitute a binder of alkyd resins which DeSoto now claims Poole did not in fact invent.

In the spring and summer of 1956, Cataphote had made limited "field installations" on public streets and highways of its newly developed thermoplastic composition, and had received about $650 from these sales. The Poole patent was invalidated because these limited sales indicated that Cataphote was engaged in commercial development and promotion of its product and not in further experimentation. Cataphote I at 27.

On April 12, 1962, Cataphote entered into a licensing agreement with Perma-Line. The contract provided that Perma-Line would have the exclusive, nationwide use of the Poole patent. In return, Perma-Line agreed to pay an initial fee and an annual royalty. The license was for the life of the patent and contained an escape clause for Perma-Line should the patent be held invalid. It also included a clause requiring Cataphote, at Perma-Line's request, to prosecute any patent infringers.³

Prior to the licensing agreement, Cataphote had sent several letters to DeSoto, alleging infringements by DeSoto of the pending Poole patent. On September 5, 1962, Cataphote sued DeSoto. On October 12, 1962, Perma-Line, which had paid only the initial license fee, gave formal notice to Cataphote that is was suspending royalty payments until successful completion of the patent suit.⁴

2. Cataphote Alone

DeSoto's claim against Cataphote alone is based upon Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 86 S.Ct. 347, 15 L.Ed.2d 247 (1965), in which the Supreme Court held that the knowing and willful misrepresentation of relevant facts to the Patent Office would not only invalidate a patent, but might also constitute ground for violation of § 2 of the Sherman Act.⁵ To recover under Walker, DeSoto must prove that (1) the Poole patent was procured by knowing and willful fraud practiced by Cataphote on the Patent Office ; and (2) all the elements necessary to establish a § 2 violation are present. Good faith is a complete defense.

The patent fraud proscribed by Walker is extremely circumscribed. In Walker the Supreme Court excluded from its definition of fraud "an honest mistake as to the effect of prior installation upon patentability — so-called `technical fraud.'" Walker, supra, at 177, 86 S.Ct. at 350. Wholly inadvertent errors or honest mistakes which are caused by neither fraudulent intent or design, nor by the patentee's gross negligence, do not constitute fraud under Walker. Beckman Instruments, Inc. v. Chemtronics, Inc., 428 F.2d 555, 566 (5th Cir. 1970); Ansul Co. v. Uniroyal, Inc., 306 F.Supp. 541, 566 (S.D.N.Y.1969). The road to the Patent Office is so tortuous and patent litigation is usually so complex, that "knowing and willful fraud" as the term is used in Walker, can mean no less than clear, convincing proof of intentional fraud involving affirmative dishonesty, "a deliberately planned and carefully executed scheme to defraud * * * the Patent Office." Hazel-Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238, 245, 64 S.Ct. 997, 1001, 88 L.Ed. 1250 (1944). Patent fraud cases prior to Walker required a rigorous standard of deceit. See, e. g., Precision Instrument Manufacturing Co. v. Automative Maintenance Machinery Co., 324 U.S. 806, 816, 65 S.Ct. 993, 89 L.Ed. 1381 (1945). Walker requires no less.⁶

The District Court found that Cataphote had not knowingly and willfully defrauded the Patent Office. This is a determination of fact ; and as we explained in Cataphote I, our scope of review is severely limited.⁷ DeSoto urges that three misrepresentations practiced by Cataphote on the Patent Office warrant a finding of Walker fraud: (1) Cataphote represented that its product had not been offered to the public, when it had ; (2) Cataphote alleged that Poole invented the alkyd resin compound, when he did not ; and (3) Cataphote fraudulently enlarged its patent claim to include the alkyd resin substance, which had been developed by another company. However, there is ample evidence in the record to support the District Court's conclusion that none of these misrepresentations were knowingly and willfully made.

Regarding prior use of the composition, it appears that, despite negotiations with public agencies and field installations in the spring and summer of 1956, the documentary evidence indicates that the Poole thermoplastic composition underwent changes throughout 1956, was being field-tested, and was not finalized until December 14, 1956, less than one year before the application filing date. Cataphote could reasonably feel that the limited volume of sales made in the previous summer totaling at most $650 would not constitute prior use sufficient to invalidate the patent, especially in the light of continued experimentation. While reliance on counsel's advice does not conclusively establish good faith, the opinion of Cataphote's counsel that he thought there had been no patent violation and his recommendation to file the application although he felt there was a certain risk involved are factors to be considered when weighing the reasonableness of Cataphote's belief that it had a patentable item. We find that the District Court was not clearly erroneous in concluding that Cataphote acted in good faith in representing that its composition had not been offered to the public within one year of its filing the patent application.

Similarly, the District Court was not clearly erroneous in finding that Cataphote had not knowingly and willfully misrepresented that Poole was the inventor of the alkyd resin compound. In Cataphote I we said that the change to an alkyd resin patent claim from a styrene resin claim was so slight as to be unimportant. The variation was but a minor alteration of the product and added nothing that was patentable. Cataphote I at 27. The evidence indicates that everyone at Cataphote, including Poole himself, honestly believed that his invention covered the alkyd resin. It is unrealistic to maintain, in any sense, that Poole was not "the original, first and sole inventor" of the compound covered by the original application. Brown v. Myerberg, 314 F.Supp. 939, 945 (S.D.N.Y.1970).

Since in Cataphote I we adopted DeSoto's contention that the alkyd-styrene substitution was so minor that it introduced nothing that was patentable, DeSoto cannot now argue that but for the misrepresentation about the resin compound, the patent would not have been granted. In other words, DeSoto failed to prove that the alleged misrepresentation was "material" to the patent. Having failed to prove materiality, DeSoto's Walker claim must fail. Walker, supra, at 177 of 382 U.S., 86 S.Ct. 347; SCM Corporation v. Radio Corporation of America, 318 F.Supp. 433, 472 (S.D.N.Y.1970).

Finally, the record indicates that the alkyd resin substitution did not enlarge the patent application to include other inventions. Nor would such enlargement while the patent was pending, even if intentionally made, constitute Walker fraud....