Hall Laboratories, Inc. v. National Aluminate Corp.

• Decision Date: 22 June 1955
• Docket Number: No. 11343.,11343.
• Citation: 224 F.2d 303
• Parties: HALL LABORATORIES, INCORPORATED, The Buromin Company, Calgon, Incorporated, and Hagan Corporation, Appellants, v. NATIONAL ALUMINATE CORPORATION.
• Court: U.S. Court of Appeals — Third Circuit

224 F.2d 303 (1955)

HALL LABORATORIES, INCORPORATED, The Buromin Company, Calgon, Incorporated, and Hagan Corporation, Appellants, v. NATIONAL ALUMINATE CORPORATION.

No. 11343.

United States Court of Appeals Third Circuit.

Argued November 1, 1954.

Decided June 22, 1955.

Rehearing Denied August 8, 1955.

Walter J. Blenko, Pittsburgh, Pa., Richards, Layton & Finger, Blenko, Hoopes, Leonard & Buell, James K. Everhart, Jr., Eugene F. Buell, Pittsburgh, Pa. (Aaron Finger, Wilmington, Del., on the brief), for plaintiffs-appellants.

John T. Chadwell, Chicago, Ill. (Arthur G. Connolly, Wilmington, Del., Richard L. Johnston, Victor P. Kayser, Chicago, Ill., on the brief), for defendant-appellee.

Before BIGGS, Chief Judge, and MARIS and KALODNER, Circuit Judges.

KALODNER, Circuit Judge.

This is an appeal from the judgment of the District Court for the District of Delaware dismissing the plaintiffs' complaint with prejudice and directing the payment to defendant of royalties, under a license agreement, which had been deposited in the registry of the Court.

The issue to be determined is whether the plaintiffs, in the circumstances of this case, are free to litigate the validity of a patent as to which they are licensees.

The plaintiffs, Hall Laboratories, Inc., The Buromin Company, Calgon, Inc., and Hagan Corporation (collectively "Hall"), affiliated companies under generally the same management, commenced this action for declaratory judgment against National Aluminate Corporation ("Nalco") seeking to be relieved of liability under a license agreement entered into on January 29, 1948, whereby Nalco granted to Hall a license under patent No. 2,358,222 ("Fink-Richardson" patent). This patent relates to the treatment of incrusting water by the addition of small quantities (one to three, and sometimes up to nine parts per million) of polyphosphoric acid compound to prevent incrustation on the walls of passageways or containers of waters. The process is known as "stabilization". There is no dispute that the practices of Hall are within the Fink-Richardson patent and the license agreement.

The facts leading to the instant litigation are as follows:

In March, 1945, plaintiffs commenced an action against Nalco seeking a declaratory judgment that their practices did not infringe the Fink-Richardson patent and that the patent was invalid. Nalco filed an answer and counterclaim charging infringement. On January 29, 1948, the parties settled the controversy. The settlement included the license agreement above referred to, a release of past infringement (Hall paying to Nalco $10,000), a covenant not to sue on another patent, and the entry of an order of an agreed judgment of dismissal. On February 10, 1948, the District Court entered a "final judgment", consented to by the parties, which recited that the parties had represented to the court that the controversy was compromised and settled, and that the defendants were granted a license. This judgment dismissed the complaint and the counter-claim, but contained no recitation as to prejudice.

Prior to the commencement of the aforesaid action, Hall Laboratories, Inc., had, in January 1945, instituted proceedings against Economics Laboratory, Inc. ("Economics") charging infringement of its patent, Re. 19,719 ("Hall" patent). Economics pleaded as a defense the invalidity of that patent citing the writings of one Fresenius. On June 13, 1947, judgment was granted in favor of Economics on the ground that there was no demonstrable distinction between the Hall patent and the Fresenius text. Hall Laboratories, Inc. v. Economics Laboratory, Inc., D.C.Minn.1947, 72 F.Supp. 683. On July 6, 1948, this judgment was affirmed in the Court of Appeals for the Eighth Circuit. 169 F.2d 65.

Nalco was not involved in the Economics litigation, nor was the Fink-Richardson patent drawn into issue.

On January 31, 1949, the plaintiffs commenced the instant action against Nalco. The complaint recites substantially the foregoing facts. It further distinguishes the Fink-Richardson patent from the Hall patent. The Hall patent relates to water softening, the process being referred to as "sequestration", and achieves its effect by adding to hard water metaphosphate in substantially larger quantities than that taught by the Fink-Richardson patent, which does not soften water. However, the complaint alleges that the Fink-Richardson patent is invalid as having been anticipated by specific prior art and patents, and by the Fresenius text as interpreted by the courts in the Economics litigation. It further alleges that Hall, as a result of the "new situation", has been evicted from the license of January 29, 1948, and accordingly prays for judgment relieving Hall from the payment of royalties. Three royalty payments had been made by Hall to Nalco before the commencement of these proceedings.

The District Court denied Nalco's motion for summary judgment. 1950, 93 F.Supp. 376. Nalco then moved, pursuant to Rule 42(b), Federal Rules of Civil Procedure, 28 U.S.C., for a separate trial on the issue whether the plaintiffs' practices and the Fink-Richardson patent correspond with the teaching of the Fresenius text. This motion was granted. 1951, 95 F.Supp. 323. The District Court held the view that Hall was estopped to contest the validity of the Fink-Richardson patent, but permitted trial with respect to the Fresenius text, which had not been referred to by Hall in the prior declaratory judgment action brought by Hall against Nalco and which had been settled. In the exercise of its discretion, it determined that such issue should be tried, for if the decison went against Hall, it would resolve the entire controversy. Following trial, the District Court found as a fact that the Fresenius text, whether or not interpreted in the light of the Economics litigation, did not correspond with the plaintiffs' practices and the Fink-Richardson patent. It also found that Hall was estopped to contest the validity of the Fink-Richardson patent, both because of the settlement of the prior action between the parties and because of the license agreement. 1954, 120 F.Supp. 684.

In the District Court, as here, Hall relied on Scott Paper Co. v. Marcalus Mfg. Co., Inc., 1945, 326 U.S. 249, 66 S.Ct. 101, 90 L.Ed. 47, as applicable authority for permitting Hall to attack the validity of the Fink-Richardson patent in the circumstances stated above.

We are of the opinion that Hall is estopped to contest the validity of the Fink-Richardson patent on the ground of the prior art, including the Fresenius text, as a result of the compromise and settlement of the prior action between these same parties. J. Kahn & Co. v. Clark, 5 Cir., 1949, 178 F.2d 111, 114. In the prior action, the prior art, except Fresenius, was pleaded, but the estoppel is created by the contract embodying the settlement and compromise and license agreement and operates uniformly on all the prior art. It is noteworthy that Hall does not distinguish between its practice at the time of the prior action and at the time of the commencement of the instant action. Moreover, at the time of the compromise and settlement of the prior action, the Fresenius text was known to Hall, as was the judicial interpretation of it, which preceded the compromise by at least six months. If Hall felt that the Economics decision jeopardized the validity of the Fink-Richardson patent, that issue could have been litigated. Hall's present suggestion that it expected the Economics decision to be reversed on appeal is without effect, since the secret mental reservations by a contracting party cannot operate to modify a freely assumed contractual obligation. Only recently, in evaluating the effectiveness of a release in a personal injury action, we said:

"True, the plaintiff is now known to have suffered to a greater extent than was previously thought. But the very nature and purpose of settlement presupposes a joint approximation of the future. The validity of a release is not conditioned upon the prescience of the parties." Thompson v. Coastal Oil Co., 3 Cir., 1955, 221 F.2d 559, 561.

In this instance, the Economics decision added an arrow to Hall's quiver, but the Hall group traded its bow in the interest of peace and profit.

We are of the further opinion that Hall as a licensee is precluded from asserting the invalidity of the licensor's patent. Cold Metal Process Co. v. United Engineering & Foundry Co., 3 Cir., 1951, 190 F.2d 217, 220. But Hall, relying on Scott Paper Co. v. Marcalus Mfg. Co., Inc., supra, places in issue the proper scope of the estoppel doctrine, and suggests overtones of policy which, if accepted, would cut across any principle preventing Hall from disputing the validity of the licensed patent.

That a licensee is estopped to show the invalidity of the licensed patent has long been an accepted part of patent law. Kinsman v. Parkhurst, 1855, 18 How. 289, 15 L.Ed. 385; United States v. Harvey Steel Co., 1905, 196 U.S. 310, 25 S.Ct. 240, 49 L.Ed. 492; Automatic Radio Mfg. Co., Inc., v. Hazeltine Research, Inc., 1950, 339 U.S. 827, 836, 70 S.Ct. 894, 94 L.Ed. 1312. Its basis has been explained by Mr. Justice Frankfurter, dissenting in MacGregor v. Westinghouse Electric and Mfg. Co., 1946, 329 U.S. 402, 413, 67 S.Ct. 421, 426, 91 L.Ed. 380, in the following terms:

"What we here have to decide is whether we shall allow the licensee to repudiate an agreement for the payment of money made in an arm\'s length transaction. For nearly a hundred years this Court has uniformly answered that question by using the legal shorthand of estoppel."

The terminology of estoppel by sanction of tradition rather than strictly logical appropriateness has been employed to designate the truth that a contract involving a patent is as binding as any other contract.¹

Considerations of public policy, however, transcend private bargaining and the traditional doctrine. Thus, in Sola Electric Co. v....