Mach Corporation v. Stokes Smith Co

• Decision Date: 03 February 1947
• Docket Number: TRANSPARENT-WRAP,No. 208,208
• Citation: 329 U.S. 637,67 S.Ct. 610,91 L.Ed. 563
• Parties: MACH. CORPORATION v. STOKES & SMITH CO
• Court: U.S. Supreme Court

329 U.S. 637

67 S.Ct. 610

91 L.Ed. 563

TRANSPARENT-WRAP MACH. CORPORATION

v STOKES & SMITH CO.

No. 208.

Argued Jan. 7, 8, 1947.

Decided Feb. 3, 1947.

Rehearing Denied March 3, 1947.

See 330 U.S. 854, 67 S.Ct. 859.

Mr. R. Morton Adams, of New York City, for petitioner.

Mr. Samuel E. Darby, Jr., of New York City, for respondent.

Mr. Justice DOUGLAS delivered the opinion of the Court.

This is a suit for a declaratory judgment (Judicial Code § 274d, 28 U.S.C. § 400, 28 U.S.C.A. § 400) and an injunction, instituted by respondent for the determination of the legality and enforceability of a provision of a patent license agreement. The District Court, whose jurisdiction was based on diversity of citizenship (Judicial Code § 24(1), 28 U.S.C. § 41(1), 28 U.S.C.A. § 41(1) entered judgment for petitioner, holding the provision valid. The Circuit Court of Appeals reversed by a divided vote, 2 Cir., 156 F.2d 198, being of the opinion that the provision in question was illegal under the line of decisions represented by Mercoid Corporation v. Mid-Continent Co., 320 U.S. 661, 64 S.Ct. 268, 88 L.Ed. 376. The case is here on a petition for a writ of certiorari which we granted because of the public importance of the question presented and of the apparent conflict between the decision below and Allbright-Nell Co. v. Stanley Hiller Co., 72 F.2d 392, decided by the Seventh Circuit Court of Appeals.

Petitioner, organized in 1934, has patents on a machine which bears the trade-mark 'Transwrap'. This machine makes transparent packages, simultaneously fills them with such articles as candy, and seals them. In 1937 petitioner sold and respondent acquired the Transwrap business in the United States, Canada, and Mexico, the right to use the trade-mark 'Transwrap', and an exclusive license to manufacture and sell the Transwrap machine under the patents petitioner then owned or might acqui e. The agreement contained a formula by which royalties were to be computed and paid. The term of the agreement was ten years with an option in respondent to renew it thereafter for five year periods during the life of the patents covered by the agreement. The agreement could be terminated by petitioner on notice for specified defaults on respondent's part. The provision of the agreement around which the present controversy turns is a covenant by respondent to assign to petitioner improvement patents applicable to the machine and suitable for use in connection with it.¹

The parties had operated under the agreement for several years when petitioner ascertained that respondent had taken out certain patents on improvements in the machine. Petitioner notified respondent that its failure to disclose and assign these improvements constituted a breach of the agreement and called on respondent to remedy the default. When that did not occur petitioner notified respondent that the agreement would be terminated on a day certain. Thereupon respondent instituted this action asking that the provisions respecting the improvement patents be declared illegal and unenforceable and that petitioner be enjoined from terminating the agreement.²

In a long and consistent line of cases the Court has held that an owner of a patent may not condition a license so as to tie to the use of the patent the use of other materials, processes or devices which lie outside of the monopoly of the patent. Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 37 S.Ct. 416, 61 L.Ed. 871, L.R.A.1917E, 1187, Ann.Cas.1918A, 959; Carbice Corporation v. American Patents Dev. Corporation, 283 U.S. 27, 51 S.Ct. 334, 75 L.Ed. 819; Leitch Mfg. Co. v. Barber Co., 302 U.S. 458, 58 S.Ct. 288, 82 L.Ed. 371; Morton Salt Co. v. S. S. Suppiger Co., 314 U.S. 488, 788, 62 S.Ct. 402, 86 L.Ed. 363; B. B. Chemical Co. v. Ellis, 314 U.S. 495, 62 S.Ct. 406, 86 L.Ed. 367; Mercoid Corporation v. Mid-Continent Co. supra; Mercoid Corporation v. Minneapolis Honeywell Co., 320 U.S. 680, 64 S.Ct. 278, 88 L.Ed. 396. As stated in Morton Salt Co. v. Suppiger Co., supra, 314 U.S. at page 492, 62 S.Ct. at page 405, 86 L.Ed. 363, '* * * the public policy which includes inventions within the granted monopoly excludes from it all that is not embraced in the invention. It equally forbids the use of the patent to secure an exclusive right or limited monopoly not granted by the Patent Office and which it is contrary to public policy to grant.' If such practices were tolerated ownership of a patent would give the patentee control over unpatented articles which but for the patent he would not possess. 'If the restraint is lawful because of the patent, the patent will have been expanded by contract. That on which no patent could be obtained would be as effectively protected as if a patent had been issued. Private business would function as its own patent office and impose its own law upon its licensees.' Mercoid Corporation v. Mid-Continent Co., supra, 320 U.S. at page 667, 64 S.Ct. at page 272, 88 L.Ed. 376. The requirement that a licensee under a patent use an unpatented material or device with the patent might violate the antitrust laws but for the attempted protection of the patent. Id. The condemnation of the practice, however, does not depend on such a showing. Though control of the unpatented article or device falls short of a prohibited restraint of trade or monopoly, it will not be sanctioned. Morton Salt Co. v. S. S. Suppiger Co., supra. For it is the tendency in that direction which condemns the practice and which, if approved by a court either through enjoining infringement or enforcing the covenant, would receive a powerful impetus. Id.

The Circuit Court of Appeals was of the view that the principle of those cases was applicable here and rendered illegal and unenforceable the covenant to assign the improvement patents to petitioner. It stated, 156 F.2d at page 202, 'The owner of all property, by withholding it upon any other terms, may, if he can, force others to buy from him; land is the best example and every parcel of land is a monopoly. But it is precisely in this that a patent is not like other property; the patentee may not use it to force others to buy of him things outside its four corners. If the defendant gets the plaintiff's patents, it will have put itself in that position, in part at any rate, by virtue of the compulsion of its own patents.'

It went on to note that since all improvement patents would not expire until after expiration of petitioner's pat- ents on the machine, the arrangement put respondent at a competitive disadvantage. For respondent would lose the negative command over the art which ownership of the improvement patents would have given it. Moreover, respondent, though able to renew the license on conditions stated in the agreement, would be irretrievably tied to it so as to be 'Forced, either to cease all efforts to patent improvements, or to keep renewing the contract in order to escape the consequences of its own ingenuity.' Id., 156 F.2d at page 203.

First. The first difficulty we have with the position of the Circuit Court of Appeals is that Congress has made all patents assignable and has granted the assignee the same exclusive rights as the patentee. 'Every application for patent or patent or any interest therein shall be assignable in law by an instrument in writing, and the applicant or patentee or his assigns or legal representatives may in like manner grant and convey an exclusive right under his application for patent or patent to the whole or any specified part of the United States.' R.S. § 4898, 35 U.S.C.Supp. V, § 47, 35 U.S.C.A. § 47. The statute does not limit the consideration which may be paid for the assignment to any species or kind of property. At least so far as the terms of the statute are concerned, we see no difference whether the consideration is services (cf. Standard Parts Co. v. Peck, 264 U.S. 52, 44 S.Ct. 239, 68 L.Ed. 560, 32 A.L.R. 1033) or cash, or the right to use another patent.

An improvement patent may, like a patent on a step in a process, have great strategic value. For it may, on expiration of the basic patent, be the key to a whole technology. One who holds it may therefore have a considerable competitive advantage. And one who assigns it and thereby loses negative command of the art may by reason of his assignment have suffered a real competitive handicap. For thereafter he will have to pay toll to the assignee, if he practices the invention. But the competi- tive handicap or disadvantage which he suffers is no greater and no less whether the consideration for the assignment be the right to use the basic patent or something else of value. That is to say, the freedom of one who assigns a patent is restricted to the same degree whether the assignment is made pursuant to a license agreement or otherwise.

If Congress, by whose authority patent rights are created, had allowed patents to be assigned only for a specified consideration, it would be our duty to permit no exceptions. But here Congress has made no such limitation. A patent is a species of property. It gives the patentee or his assignee the 'exclusive right to make, use, and vend the invention or discovery' for a limited period. R.S. § 4884, 35 U.S.C. § 40, 35 U.S.C.A. § 40. That is to say, it carries for the statutory period 'a right to be free from competition in the practice of the invention.' Mercoid Corporation v. Mid-Continent Co., supra, 320 U.S. at page 665, 64 S.Ct. at page 271, 88 L.Ed. 376. That exclusive right, being the essence of the patent privilege, is, for purposes of the assignment statute, of the same dignity as any other property which may be used to purchase patents.

Second. What we have said is not, of course, a complete answer to the position of the Circuit Court of Appeals. For the question remains whether here, as in Mercoid Corporation v. Mid-Continent Co., supra, and its predecessors, the condition in the license agreement violates some...