In re Yarn Processing Patent Validity Litigation

• Decision Date: 12 June 1979
• Docket Number: M.D.L. Docket No. 82.
• Citation: 472 F. Supp. 180
• Parties: In re YARN PROCESSING PATENT VALIDITY LITIGATION.
• Court: U.S. District Court — Southern District of Florida

472 F. Supp. 180

In re YARN PROCESSING PATENT VALIDITY LITIGATION.

M.D.L. Docket No. 82.

United States District Court, S. D. Florida.

June 12, 1979.

James L. Armstrong, III and Hugh Turner and James Crabtree, Smathers & Thompson, Miami, Fla., for Lex Tex Ltd., Inc.

William K. West, Jr., Cushman, Darby & Cushman, Washington, D. C., for Burlington Industries.

Dale H. Hoscheit and Gene W. Stockman, Schuyler, Birch, Swindler, McKie & Beckett, Washington, D. C., for Monsanto of North Carolina, Inc.

Wallace D. Newcomb, Philadelphia, Pa., for Collins & Aikman.

David Rabin, Greensboro, N. C., for Dow-Badische Co., National Spinning Co., Collins & Aikman and Glen Raven Mills, Inc.

David Klingsberg and David F. Ryan, Kaye, Scholer, Fierman, Hays & Handler, New York City, for National Spinning Co., Dow-Badische Co. and Hoechst Fiber Industries.

Philip Koenig, Boston, Mass., and C. Reed Guthridge, Miami, Fla., for Leesona Corp.

Arthur O. Cooke, Cooke & Cooke, Greensboro, N. C., for ARCT.

MEMORANDUM OPINION ON PURGE

ATKINS, Chief Judge.

The history of this litigation is complex and has been dealt with in various other opinions.¹

Lex Tex is the owner of three double heater patents, 3,091,912, 3,077,724 and 3,472,011, which involve the false twist processing method of producing synthetic yarns.² The '912 and '724 patents were assigned to Lex Tex by Leesona Corporation of Warwick, Rhode Island, and the '011 patent was acquired from the British company of Ernest Scragg and Sons, Ltd. Lex Tex had previously sued several producers of textured yarn called throwsters for infringement under these patents. The cases were transferred before this Court for consolidated pretrial proceedings under 28 U.S.C. § 1407, by the Judicial Panel on Multidistrict Litigation. This Court granted summary judgment for the Throwsters finding Lex Tex's patents misused and unenforceable. 398 F.Supp. 31 (S.D.Fla.1975). The Court of Appeals affirmed, holding that the patent holder had misused its patents due to licensing agreements it had entered into with three machinery manufacturers, Leesona Corporation, Barmag Barmer Maschinefabrick, AG, and Scragg. 541 F.2d 1127, 1139-42 (5th Cir. 1976), cert. denied, 433 U.S. 910, 97 S.Ct. 2976, 53 L.Ed.2d 1094 (1977).³

The illegal aspect of the licensing agreements found by the Court of Appeals was paragraph (5),⁴ which guaranteed the manufacturers a percentage of the compensation received by Lex Tex on machines sold by them and licensed by the patent holder. The court held this arrangement constituted price fixing violative of the Sherman Act under United States v. Line Material, 333 U.S. 287, 68 S.Ct. 550, 92 L.Ed. 701 (1947), and therefore the patents were misused and unenforceable. 541 F.2d at 1141-42.

Lex Tex brought another round of infringement actions against several other throwing companies and machinery manufacturers alleging infringement of these three patents. These cases were again transferred to this Court under § 1407. The Court, in an order entered on August 23, 1978, applied collateral estoppel to preclude relitigation of the misuse issue by Lex Tex, and held that Lex Tex could not enforce its patents prior to January 1, 1973.⁵

On October 4, 1978, the Court, pursuant to Rule 42(b) of the Federal Rules of Civil Procedure, ordered a bifurcated trial on the issue of purgation of the misuse found by the Court of Appeals. The Court also ordered "any party not presently subject to the jurisdiction and venue of the Court" who elected "to file a declaratory judgment action, to do so before October 24, 1978." Subsequently, several of the defendant Throwsters filed declaratory judgment actions on the purge issue before the Court which were consolidated with the other MDL 82 cases and the Collins & Aikman action already docketed in this forum.⁶ The Court then entered an order precluding those Throwsters and machinery manufacturers who failed to file declaratory actions or stipulate to be bound by the result of the trial from asserting the defense of collateral estoppel upon remand of these cases to their respective transferor forums.⁷ A consolidated bench trial on the issue of purge was then held as scheduled before this Court.⁸

I. THE LAW OF PURGE

As this Court stated on an earlier occasion, misuse is a defense arising out of the doctrine of "unclean hands." The doctrine of misuse developed based on "the strong public policy against allowing one who wrongfully uses a patent to enforce it during the misuse, the remedy of purge has developed, requiring that there be a showing that a dissipation or purge of the misuse has occurred, before the patentee may enforce his patent." In re Yarn Processing Patent Validity Litigation, 472 F.Supp. 178 (S.D.Fla.1979); United States Gypsum Co. v. National Gypsum Co., 352 U.S. 457, 465, 77 S.Ct. 490, 1 L.Ed.2d 465 (1957). Courts have uniformly applied a two-prong test to determine whether purge has been effected. The patent holder must demonstrate a complete abandonment of the improper practices found to constitute the particular misuse and that the consequences of the misuse have been fully dissipated. Morton Salt Co. v. G. S. Suppiger, 314 U.S. 488, 62 S.Ct. 402, 86 L.Ed. 363 (1942); B. B. Chemical Co. v. Ellis, 314 U.S. 495, 62 S.Ct. 406, 86 L.Ed. 367 (1942). The burden is on the patent holder to show purge, B. B. Chemical Co., supra, Preformed Line Products Co. v. Fanner Mfg. Co., 328 F.2d 265, 279 (6th Cir.), cert. denied, 379 U.S. 846, 85 S.Ct. 56, 13 L.Ed.2d 51 (1964); Ansul Co. v. Uniroyal, Inc., 306 F.Supp. 541, 560 (S.D.N. Y.1969), mod. & aff'd 448 F.2d 872 (2d Cir.), cert. denied, 404 U.S. 1018, 92 S.Ct. 680, 30 L.Ed.2d 666 (1971); and the evaluation of the acts necessary to constitute purge of the misuse are largely within the trial court's discretion. Preformed Line Products Co., supra, at 279; Koratron Co. v. Lion Uniform, Inc., 409 F.Supp. 1019, 1022 (N.D.Cal.1976). Thus, the question of purge is generally one of fact. United States Gypsum Co. v. National Gypsum Co., supra.

In the present case, the burden is on Lex Tex to show (1) that it has effectively abandoned the misuse by repudiating the illegal provisions in the licensing agreements; and (2) that the effects and consequences of the misuse have been dissipated. This Court holds that Lex Tex has carried that burden.

II. REPUDIATION OF THE ILLEGAL PROVISIONS IN THE MANUFACTURERS' LICENSE AGREEMENTS

At the outset, Lex Tex must prove that it has effectively repudiated the illegality found in the manufacturers' license agreements by the Court of Appeals. The Throwsters contend Lex Tex has never successfully abandoned the illegal practices. To establish purge, the law requires the patent holder engage in clear and unequivocal affirmative action in abandoning the misuse. Koratron Co. v. Lion Uniform, Inc., 409 F.Supp. 1019, 1028 (N.D.Cal.1976). Mere non-enforcement of the illegal provision is itself insufficient abandonment under the law of purge. Hensley Equipment Co., Inc. v. Esco Corporation, 383 F.2d 252, 261 (5th Cir. 1967); Berlenbach v. Anderson & Thompson Ski Co., 329 F.2d 782, 785 (9th Cir. 1964); Koratron, supra, at 1025.

The testimony of Timothy Dufort, former Chairman of the Board at Scragg, and two of Scragg's former employees, Messrs. Hacking and McNeight, indicates that at a meeting attended by McNeight and Hacking on October 10, 1972, Mr. Fredrick Tecce, Sr., 50% owner of Lex Tex, stated unequivocally that Lex Tex would make no further paragraph (5) payments to Scragg. According to the testimony, it was clear to all present and observing that thereafter, Scragg would receive no further "kickback" payments under that provision. Mr. Dufort also stated that he met with Tecce on October 19, 1972, and Tecce reiterated Lex Tex's position to him at that time. Dufort testified that Scragg did nothing about it because "it was his business, not ours." Record at 1737-39.

Dufort also testified that the reason for the agreement was that when Scragg was approached by Lex Tex "we felt we ought to make arrangements with Lex Tex of some sort, because we did not wish to face an infringement action against ourselves or against our customers under those Lex Tex patents." Id. at 1721. According to his testimony, the paragraph (5) rebate provision played little or no role in Scragg's desire to enter into a licensing agreement with Lex Tex. Id. at 1722.

Lex Tex's subsequent activities with regard to these provisions were not similarly unequivocal. An illustration of this fencesitting attitude adopted by Lex Tex is a letter sent from then Lex Tex President, R. G. Lubbers, Jr., to Barmag. The concluding paragraph of this letter, dated November 8, 1974, reads as follows:

"Will you therefore reply within ten days of receipt of this letter indicating your consent to cancel the aforementioned agreement, that is, all understandings or agreements between us. Lex-Tex feels quite strongly that if you do not agree to cancel the agreement you should become a party to the lawsuit and assist in our mutual defense, preferably voluntarily."

The equivocation found in this paragraph is evident. Lex Tex clearly asked Barmag either to agree to terminate the agreement or to assist in the defense of the questionable provision.⁹

Another example of Lex Tex's equivocation with regard to the paragraph (5) rebate provisions is the publication in 1977 of misleading notices in a leading textile trade journal, The Daily News Record. These notices which purported to reflect the status of the MDL 82 litigation read in part:

"A favorable determination has been made in the Fifth Circuit litigation concerning an attack on the validity of Lex Tex patent product claims. Furthermore, the Court sustained only one of several asserted grounds of patent misuse by Lex Tex, and this ruling was based upon grounds which have ceased to or never did exist."

In his testimony, Mr. Robert F. Conrad, President and 50% owner of Lex...