Cohn v. Compax Corp.

• Decision Date: 14 June 1982
• Citation: 451 N.Y.S.2d 171,87 A.D.2d 364
• Parties: , 220 U.S.P.Q. 1077, 1982-2 Trade Cases P 64,800 Eugene COHN et al., Respondents, v. COMPAX CORPORATION, Appellant.
• Court: New York Supreme Court — Appellate Division

Page 171

451 N.Y.S.2d 171

87 A.D.2d 364, 220 U.S.P.Q. 1077,

1982-2 Trade Cases P 64,800

Eugene COHN et al., Respondents, v. COMPAX CORPORATION, Appellant.

Supreme Court, Appellate Division Second Department.

June 14, 1982.

Skadden, Arps, Slate, Meagher & Flom, New York City (James E. Lyons, Michael H. Diamond, Timothy G. Reynolds and Robert W. Wien, New York City, of counsel), for appellant.

Irving A. Cohn, P. C., Mineola (Allan D. Goldstein, Mineola, and Robert W. Fiddler, New York City, of counsel), for respondents.

Before MOLLEN, P. J., and WEINSTEIN, GULOTTA and THOMPSON, JJ.

MOLLEN, Presiding Justice.

On this appeal, we are called upon to examine the doctrine of patent misuse. The issue at bar arises out of the defendant's efforts to avoid its obligations under a contract for the transfer of rights to certain patent applications and resulting patents. We turn first to a brief review of the pertinent facts.

The Cohn family has been involved in the manufacture of textile machinery since 1929. In 1957, Eugene Cohn and his brother Joseph played a major part in the invention of a process to eliminate shrinkage in the laundering of tubular knit garments. The process was performed by a machine, known as the compactor, which would preshrink knitted goods by rolling and compressing the fabric.

In February, 1957, the Cohns filed an application for a patent in connection with their invention. In January, 1958, they filed two additional patent applications for the compactor. In July, 1958, while the three applications were pending, the Cohns formed the Compax Corporation (Compax) and entered into a contract with it for the transfer of rights under the patent applications. The contract provided in pertinent part that the Cohns "herewith sell, set over, assign and transfer to COMPAX CORP., all of their right, title and interest in and to" the three pending patent applications and any patents "which may issue thereon". The Cohns further assigned "all of their right, title and interest in and to any and all applications for letters patent and the patents which may be issued thereon, and which may be filed in any foreign jurisdiction on the basis of the United States applications for letters patent and the patents which may be issued."

As consideration for the transfer of these rights, Compax agreed to pay a "purchase price" consisting, inter alia, of "$2,000, together with 1/4th of all rents, royalties or commissions collected by COMPAX CORP. during the life of the patents on all machinery which it may license and which embodies the methods, apparatus or equipment described in the applications for patents aforementioned or the patents to be issued thereon in the United States or elsewhere." Contemplating a subsequent reduction in the payments due, the contract provided additionally that, if "the machinery, method, apparatus or equipment which is sold or licensed embodies the * * * patents, as well as methods, improvements and apparatus covered by other patents, or embodies the standard finishing operations, methods and apparatus not covered by patents, then * * * the rent, royalties, commissions, costs and profits shall be pro-rated and allocated in such a manner that an equitable sum be reflected as the royalty or profit * * * for the subject invention giving proper effect and valuation to the royalty or profit applicable to the other patented items as well as the standard finishing operations."

All payments described in the contract were to continue "until the expiration of the last patent to be issued in the United States or elsewhere." ¹

On January 2, 1962, patents were issued on two of the Cohns' patent applications. On April 2, 1963, a third patent was issued. Thereafter, some 15 foreign patents were issued throughout the world. The last of these, issued in Austria, is due to expire on June 15, 1985.

Compax, which passed out of the Cohns' hands in 1968, abided by the contract and did not question its obligations thereunder until July, 1979, when the corporation's president gave notice that the Cohns had been overpaid and that future royalties, if due, would be reduced to reflect the overpayment. It was Compax' position that it was entitled to a proportionate reduction in payments as various patents encompassed by the contract expired. Eugene Cohn and the successors in interest of his now-deceased brother rejected this suggestion, relying on the language of the contract which required Compax to make full royalty payments "until the expiration of the last patent to be issued in the United States or elsewhere."

When Compax refused to make the payments called for under the contract, plaintiffs commenced this action seeking an accounting and damages for breach of contract. ² Compax interposed two counterclaims, one of which sought a judgment declaring (1) that payments under the contract be limited to royalties, rents and commissions for the use of those processes for which patents have not yet expired, and (2) that, pursuant to the contract, there be a pro rata reduction in payments due for the period between January 3, 1979, the date upon which the first two United States patents expired, and April 2, 1980, the date on which the third and last United States patent expired. Subsequently, Compax moved for partial summary judgment on this counterclaim, seeking a judgment declaring (1) that there be a pro rata reduction in payments due for the period between January 3, 1979 and April 2, 1980, (2) that Compax not be obligated to make payments based upon the use of processes embodied in the United States patents after April 2, 1980, and (3) that, with respect to any period after April 2, 1980, Compax be obligated to make payments based only on the use of processes embodied in unexpired foreign patents and only to the extent that such use is related to the foreign country in which the patent is in effect.

Special Term denied the motion, and Compax now appeals.

Compax does not deny that the plain language of the contract obligates it to pay full royalties until the expiration of the patent last issued--here, the Austrian patent due to expire in 1985. Nevertheless, Compax argues that the contractual provisions are unenforceable because they constitute patent misuse and, therefore, are contrary to public policy. Plaintiffs contend that the doctrine of patent misuse has no application in the context of this case since the contract is not a licensing agreement, but rather an unencumbered sale of all rights to patent applications and resulting patents. Compax replies that the form of the transaction--whether a licensing or a sale--is immaterial to the policy considerations underlying the doctrine of patent misuse.

At the outset, we agree with the plaintiffs' contention, which is not seriously disputed by Compax, that the contract here represents not a licensing agreement but a full assignment and sale of all the Cohns' rights. (See, e.g., Waterman v. Mackenzie, 138 U.S. 252, 11 S.Ct. 334, 34 L.Ed. 923; Hook v. Hook & Ackerman, 3rd Cir., 187 F.2d 52; Hooker Chem. & Plastics Corp. v. United States, Ct.Cl., 591 F.2d 652.) Contrary to the plaintiffs' view, however, we see no conceptual significance in the distinction. (See Compton v. Metal Prods., 4th Cir., 453 F.2d 38, 46, cert. den. 406 U.S. 968, 92 S.Ct. 2414, 32 L.Ed.2d 667.) Nor is it of any particular importance that the contract was entered into before any patents were issued on the Cohns' applications. (See Reich v. Reed Tool Co., 582 S.W.2d 549 cert. den. 446 U.S. 946, 100 S.Ct. 2176, 64 L.Ed.2d 803.) The issue before us, therefore, may be framed as whether a sale of rights under pending patent applications is enforceable where the consideration consists of periodic payments, based on use, to continue unabated and undiminished until the expiration of the last patent issued on the basis of the pending applications. We hold that such a contract may indeed be enforceable and that, on the papers submitted, Compax' motion for partial summary judgment was properly denied.

A patent is a limited monopoly which, for a term of 17 years, confers upon an inventor the right to exclude others from making, using or selling his invention. (See U.S.Code, tit. 35, § 154.) By rewarding inventive genius, the patent laws serve to promote the progress of science and the useful arts. (See, e.g., United States v. Masonite Corp., 316 U.S. 265, 278, 62 S.Ct. 1070, 1077, 86 L.Ed. 1461.) And, by restricting the reward to a limited period of time, the patent laws assure "not only that members of the public shall be free to manufacture the product or employ the process disclosed by the expired patent, but also that the consuming public at large shall receive the benefits of the unrestricted exploitations, by others, of its disclosures." (Scott Paper Co. v. Marcalus Mfg. Co., 326 U.S. 249, 255, 66 S.Ct. 101, 104, 90 L.Ed. 47.)

Although the terms of the patent monopoly are limited, patent holders have often been known to seek benefits not contemplated within the grant. Among the devices employed to this end is the imposition of unrelated conditions upon the sale or licensing of the patent. Early cases viewed these attempts as permissible and merely incidental to the lawful implementation of the patent rights. (Heaton-Peninsular Button-Fastener Co. v. Eureka Specialty Co., 6th Cir., 77 F. 288, 296; see, also, Henry v. A. B. Dick Co., 224 U.S. 1, 32 S.Ct. 364, 56 L.Ed. 645.) With the passage of time, however, our "historical antipathy to monopoly" (Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518, 530, 92 S.Ct. 1700, 1707, 32 L.Ed.2d 273) led to the imposition of "strict limitations on the power of the patentee to attach conditions to the use of the patented article." (United States v. Masonite Corp., 316 U.S. 265, 277, 62 S.Ct. 1070, 1077, 86 L.Ed. 1461, supra.) And, in order to enforce those limitations, the courts developed the doctrine of patent misuse which, operating...