Handgards, Inc. v. Ethicon, Inc.

• Decision Date: 03 May 1979
• Docket Number: No. 76-3150,76-3150
• Citation: 601 F.2d 986,202 USPQ 342
• Parties: , 202 U.S.P.Q. 342, 1979-1 Trade Cases 62,625 HANDGARDS, INC., a corporation, Plaintiff-Appellee, v. ETHICON, INC., a corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 986

601 F.2d 986

62 A.L.R.Fed. 183, 202 U.S.P.Q. 342,

1979-1 Trade Cases 62,625

HANDGARDS, INC., a corporation, Plaintiff-Appellee, v. ETHICON, INC., a corporation, Defendant-Appellant.

No. 76-3150.

United States Court of Appeals, Ninth Circuit.

May 3, 1979.

As Modified on Denial of Rehearing and Rehearing En Banc

July 27, 1979.

David F. Dobbins (argued), New York City, George S. Frazza, New Brunswick, N.J., Robert M. Dunne, Phelps, Mills, San Francisco, Cal., for defendant-appellant.

Maxwell M. Blecher (argued), Blecher, Collins & Hoecker, Joel R. Bennett, Kendrick, Netter, Orr & Bennett, Los Angeles, Cal., Morrison & Foerster, San Francisco, Cal., for plaintiff-appellee.

On Appeal from the United States District Court for the Northern District of California.

Before SNEED and KENNEDY, Circuit Judges, and VON DER HEYDT, ^* District Judge.

SNEED, Circuit Judge.

Ethicon appeals from a judgment rendered after a civil jury trial in which it was found guilty of violating Section 2 of the Sherman Act by monopolizing or attempting to monopolize the market for heat-sealed plastic gloves sold to manufacturers of home hair care coloring kits. Plaintiff-appellee Handgards bases its private antitrust action upon its contention that Ethicon earlier had initiated and pursued a series of patent infringement suits against it in bad faith, or as an integral part of an overall scheme to monopolize. On appeal, Ethicon argues, Inter alia, that the district court erred in instructing the jury that Ethicon could be found guilty of an antitrust violation upon proof by a mere preponderance of the evidence that it had prosecuted one or more ill-founded patent infringement actions in bad faith and with an intent to monopolize. This court has jurisdiction pursuant to 28 U.S.C. § 1291. Because we conclude that the district court erred in so instructing the jury and because of certain deficiencies with respect to the court's charge regarding damages, we reverse the judgment entered below and remand the case for a new trial.

I. Factual Background

It is helpful to set forth a brief description of the patent enforcement conduct which forms the basis for Handgards' antitrust complaint before reviewing the history of the instant action.

A. The Prior Patent Enforcement Conduct.

The plaintiff-appellee Handgards, Inc. is a Nebraska corporation engaged in the business of manufacturing, distributing, and selling disposable plastic gloves adhered to paper. Handgards was formed from the 1966 merger of two constituent disposable plastic glove manufacturers: Plasticsmith, Inc. (Plasticsmith) and Mercury Manufacturing Company (Mercury). The defendant-appellant Ethicon, Inc. is a wholly-owned subsidiary of Johnson & Johnson and is engaged in the business of manufacturing, selling, and distributing surgical supplies. Prior to 1969, Ethicon manufactured, distributed, and sold disposable plastic gloves adhered to paper through its Arbrook division. Ethicon ended its participation in the disposable plastic glove business in 1969, when the assets of its Arbrook division were transferred to another Johnson & Johnson subsidiary named Arbrook, Inc.

In 1961 Ethicon acquired the assets of the Scott Company, which, for several years, had marketed disposable plastic gloves produced in accordance with a process developed by one of its founders, Joe Gerard. In so doing, Ethicon acquired both Gerard's pending application for a patent on his glovemaking process, as well as his glovemaking equipment. ¹ In 1961 Ethicon also acquired the pending patent application of one Rene Orsini. ² On April 3, 1962, the Gerard patent covering a glovemaking process issued to Ethicon. On October 20, 1964, the Orsini product patent covering a heat-sealed glove issued to Ethicon.

Both Plasticsmith and Mercury were engaged in the manufacture of heat-sealed disposable plastic gloves at the time the Gerard patent issued in 1962. After several months of unproductive negotiations concerning a licensing agreement for the Gerard patent between Ethicon and T. Hamil Reidy, the chief executive officer and controlling shareholder of Plasticsmith and Mercury, Ethicon filed patent infringement suits in October 1962 against both Plasticsmith and Mercury, alleging infringement of the Gerard patent. ³ In December 1964, after the Orsini patent issued, Ethicon supplemented its patent infringement complaints against Plasticsmith and Mercury by adding a claim that the Orsini patent also was being infringed.

In 1966 Plasticsmith and Mercury were merged into a successor corporation, Handgards, Inc., the plaintiff in this case. Reidy continued as the chief executive officer and controlling shareholder in Handgards. In 1967, after learning that some of the allegedly infringing machines operated by Handgards reportedly were owned by Reidy rather than by Handgards or either of its predecessor corporations, Ethicon filed an infringement action against Reidy individually at his Chicago, Illinois residence. Reidy thereafter voluntarily intervened in the consolidated action then pending in California.

The consolidated patent infringement suit was tried to the court in 1968. Ethicon's trial counsel dropped the claims concerning the Orsini patent from the action, reportedly because he thought Orsini to be the weaker of the two patents and because he believed that narrowing the issues before the court would enhance the chance of successfully prosecuting the Gerard patent. On April 25, 1968, the trial judge entered judgment for Handgards, concluding that the Gerard patent was invalid because of the existence of a "prior public use" of the process by Lyle Shabram, one of the founders of Plasticsmith. ⁴ On appeal, this court affirmed the district court in a brief per curiam decision. ⁵

B. History of the Present Action.

Plaintiff-appellee Handgards filed this civil antitrust action in 1968 seeking to recover treble damages and other equitable relief for the injuries it claimed to its business and property by virtue of the alleged antitrust violations committed by defendant-appellant Ethicon and defendant Johnson & Johnson. The gist of the plaintiff's complaint was that the parent-subsidiary defendants had either unilaterally or in concert, monopolized, attempted to monopolize, and conspired to monopolize trade and commerce for the purpose of eliminating plaintiff as a competitor in the sale of disposable plastic gloves to the hair care and medical markets.

Plaintiff altered its primary theory of recovery dramatically during the eight year period between the time it commenced this action and the time of trial in 1976. Handgards' suit began primarily as a Walker Process case, i. e., a suit alleging antitrust liability for the enforcement of a fraudulently obtained patent (Orsini). ⁶ See Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 86 S.Ct. 347, 15 L.Ed.2d 247 (1965). This theory ultimately proved not viable. ⁷ In 1975 Handgards expressly abandoned the Walker Process theory at a hearing on a motion for summary judgment and instead asserted the two theories on which this case ultimately was tried: the first was referred to at trial as the "overall scheme" theory; the second was referred to as the "bad faith" theory. The district court's published opinion on the motion for summary judgment reflected the new orientation of plaintiff's case. Handgards, Inc. v. Johnson & Johnson, 413 F.Supp. 921 (N.D.Cal.1975).

(1) Handgards now largely bases its monopolization charge on the various patent infringement and other lawsuits brought on behalf of Ethicon by J & J house patent counsel. The claim is rooted in Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th Cir. 1952), Cert. denied, 344 U.S. 837, 73 S.Ct. 46, 97 L.Ed. 651 (1952), and its progeny particularly Mach-Tronics, Incorporated v. Zirpoli, 316 F.2d 820 (9th Cir. 1963), Rex Chainbelt, Inc. v. Harco Products, Inc., 512 F.2d 993 (9th Cir. 1975), and Prelin Industries, Inc. v. G & G Crafts, Inc., 357 F.Supp. 52 (W.D.Okl.1972). The Ethicon suits were purportedly brought as integral ingredients of a scheme to monopolize the disposable glove market. . . .

(2) Plaintiff charges that defendants attempted to create a monopoly in the disposable glove industry by accumulating a number of the relevant patents no matter how weak or narrow and then instigating a series of lawsuits in order to slowly litigate the competition out of business.

The bringing of a series of ill-founded patent infringement actions, in bad faith, can constitute an antitrust violation in and of itself If such suits are initiated or pursued with an intent to monopolize a particular industry (and, of course, the other elements of a Section 2 violation are present). Otter Tail Power Co. v. United States, 410 U.S. 366, 93 S.Ct. 1022, 35 L.Ed.2d 359 (1973); California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 92 S.Ct. 609, 30 L.Ed.2d 642 (1972); Kellogg Co. v. National Biscuit Co., 71 F.2d 662, 666 (2d Cir. 1934); Bolt Associates, Inc. v. Rix Industries, supra, (1973-1 Trade Cases, P 74,474 (N.D.Cal.1973)).

413 F.Supp. at 923-25 (emphasis in original).

The court defined the term "bad faith" in this context as knowing that the particular patent was invalid because (i) Ethicon allegedly knew (through its agent Gerard) of relevant prior art existing more than a year before the filing of the Gerard patent application; (ii) Ethicon allegedly knew (through its agent Gerard) that the invention had been on sale more than a year prior to the filing of the Gerard patent application; or (iii) Ethicon allegedly knew that the Orsini patent was invalid because material information had been withheld from the patent examiner. ⁸ Id. at 925.

At the trial the parties presented dramatically different versions of the facts to the jury. Plaintiff contended that Ethicon had accumulated the Orsini and Gerard patents, two key patents in the field, intending to...