Nachman Spring-Filled Corporation v. Kay Mfg. Co.

• Decision Date: 18 November 1943
• Docket Number: No. 59.,59.
• Parties: NACHMAN SPRING-FILLED CORPORATION v. KAY MFG. CO.
• Court: U.S. Court of Appeals — Second Circuit

139 F.2d 781 (1943)

NACHMAN SPRING-FILLED CORPORATION v. KAY MFG. CO.

No. 59.

Circuit Court of Appeals, Second Circuit.

November 18, 1943.

COPYRIGHT MATERIAL OMITTED

Edmund Quincy Moses, of New York City, and R. W. Lotz, of Chicago, Ill., for plaintiff-appellee.

John J. Sweedler, of New York City (Harry Jacobson, of New York City, of counsel), for defendant-appellant.

Before L. HAND, SWAN, and FRANK, Circuit Judges.

FRANK, Circuit Judge.

Defendant, in its brief on appeal, argues that, if the patent is invalid, the agreement is void as in restraint of trade, and that therefore we must inquire into the validity of the patent. This contention was not made in the court below; but we do not reject it on that account, since Muncie Gear Co. v. Outboard Co., 315 U.S. 759, 766, 768, 62 S.Ct. 865, 870, 86 L.Ed. 1171, seems to us to hold that regard for "the public interest sought to be safeguarded by the patent statutes, and so frequently present but so seldom adequately represented in patent litigation" requires that an upper court should consider important defenses in such litigation even though not raised in the court below.¹

In Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173, 63 S.Ct. 172, 87 L.Ed. 165, the court (to the surprise of the patent bar generally) held that the so-called implied estoppel of a patent licensee, to question the validity of the patent under which he is licensed, is inoperative, even if the estoppel would otherwise be effective under federal or state law, when the license agreement contains a provision fixing prices, since such a provision, should the patent be not valid, will violate the Sherman Act, 15 U.S.C.A. §§ 1-7, 15 note. In American Cutting Alloys, Inc. v. General Electric Co., 2 Cir., 135 F.2d 502, 504-505, we recently applied the Sola doctrine where a license agreement contained both a price-fixing clause and an express covenant not to question the validity of the patent.

In the instant case, too, the covenant is express. But here we find it in an agreement, containing no price-fixing clause, which was made by one not a licensee or assignor. That the defendant is not a licensee or assignor may strengthen its defensive position, for reasons we shall note later. It is suggested, however, that the Sola doctrine is inapplicable to an agreement which unreasonably restrains competition but does not fix prices. We cannot agree. True, the court in the Sola case 317 U.S. 173, 63 S.Ct. 173, 87 L.Ed. 165 specifically referred to "the doctrine of estoppel" as being "in conflict with the Sherman Act's prohibition of price-fixing." But the rationale of the opinion is that there can be no valid estoppel to deny the validity of a patent if the estoppel will result in a contravention of federal anti-trust laws. The court concluded its opinion with the statement that "rules of estoppel which would fasten upon the public as well as the petitioner the burden of an agreement in violation of the Sherman Act must yield to the Act's declaration that such agreements are unlawful, and to the public policy of the Act which in the public interest precludes the enforcement of such unlawful agreements. Cf. Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488, 492, 493, 62 S.Ct. 402, 405, 86 L.Ed. 363." As that act renders unlawful not merely price-fixing agreements but all agreements which, in any way, unreasonably restrain competition in interstate commerce, the conclusion is inescapable that the Sola case doctrine applies to any such agreement. The citation in the Sola opinion of the Morton Salt case is significant; for, in the latter case, the court refused to enjoin infringement of a patent the owner of which, the plaintiff, was restraining competition not through price-fixing but by requiring its licensees (the defendant not being one of them) to buy non-patented articles from plaintiff.^1a We are fully aware that our conclusion may gravely affect many patent licenses, that it may, in many instances remove one of the principal motives inducing the grant of a license. But we think that the logic of the Sola case compels that conclusion.

The agreement here is one by which defendant agreed with plaintiff, a competitor, to cease making and selling, throughout the United States and for thirteen years, a commodity which both parties had theretofore been making and selling. If, disregarding the patent, the effect of the agreement would be unreasonably to restrain competition,^1b then only the validity of the patent can rescue the agreement from the jaws of the anti-trust laws. Accordingly defendant's covenant acknowledging the patent's validity constitutes, in effect, an undertaking that, if sued by plaintiff for enforcement of that agreement, defendant will not assert the defense that the agreement is illegal. Such a raising-by-one's-boot's-straps undertaking, of course, cannot be enforced.²

In the Sola case, the court said that, in its earlier decisions concerning the estoppel of a patent licensee to contest the patent's validity, the rule of estoppel had been applied without discussion, and suggested that, absent a Sherman Act situation, the question may be one of state law.³ This would seem to mean that such an agreement as that before us is illegal, unless the patent is valid, if, regarding the agreement as one relating to an unpatented commodity, it would be illegal according to State law. By the common law of most jurisdictions, an agreement restricting competition is illegal unless it is "ancillary" to the sale of a business or the like.^3a In the instant case, the agreement is not thus "ancillary." Accordingly, even if it does not violate the Sherman Act, it may, under the Sola doctrine, be unenforceable, unless the patent is valid.

The agreement here perhaps confronts another difficulty. In most of the cases, decided before Sola, which sustained an estoppel, whether implied or based on an express covenant, the estoppel ran against either an assignor of the patent or a licensee thereunder, and those decisions seemed to have relied on analogies of conveyances or leases of land.⁴ But as here the defendant is neither an assignor nor a licensee, the patent-estoppel cases, even as they stood in pre-Sola days, may not be protective of the agreement, and, even assuming that the Sola doctrine is limited to price-fixing agreements, the agreement here may be illegal under the common-law rule as to contracts, not "ancillary," in restraint of trade.

In Pope Mfg. Co. v. Gormully, 144 U.S. 224, page 233, 12 S.Ct. 632, 636, 36 L.Ed. 414 (in a case to which the Sherman Act was inapplicable because the agreement before the court was made and the litigation began prior to the enactment of that statute), the court construed the agreement as one by which the defendant, in consideration of the grant to it by plaintiff of licenses under fifteen patents, agreed not to dispute the validity of or plaintiff's title to, and not to infringe, not only those but fifty other patents;⁵ the plaintiff filed a bill seeking an injunction restraining defendant from breaching the agreement as to certain of those patents under which defendant was not licensed; the court affirmed a decree dismissing the bill. Stating that "the real question is whether the defendant can estop himself from disputing patents which may be wholly void, or to which the plaintiff may have no shadow of title," the court went on to hold that, on grounds of public policy, equity must refuse to give specific enforcement (by way of injunction) of such a contract because "it is important to the public that competition should not be repressed by worthless patents." It is true that the court referred to possible overreaching by plaintiff in the making of the contract, but it did not rest its decision on that ground.⁶ True, too, the court described the contract as one "not to set up any defense whatever to any suit that may be begun upon 50 different causes of action"; so that it is arguable that the doctrine of that case has no relevance where, as here, the contract relates to but a single patent. Yet that is by no means clear. For the court discussed at length (pages 235, 236 of 144 U.S., page 636 of 12 S.Ct., 36 L.Ed. 414) cases holding that one may not legally in a contract agree not to avail himself of a defense, "secured to him on grounds of public policy," even as to a single cause of action arising under that contract.⁷ Moreover, the court in the Pope Mfg. case, in stressing the public policy of preventing suppression of competition by "worthless patents," articulated an attitude recently voiced, in even more emphatic terms, by the Supreme Court as presently constituted, in Morton Salt v. Suppiger, supra, B. B. Chemical Co. v. Ellis, supra, and Muncie Gear Co. v. Outboard Co., supra. In Philadelphia Creamery Supply Co. v. Davis & Rankin Bldg. & M. Co., C.C.N.D.Ill., 77 F. 879, 881, the defendant, when granted a license under certain patents, agreed not to contest the validity of certain other patents; there was no suggestion of overreaching, but the court, referring to the Pope Mfg. case, said, in a dictum, that such an agreement "would not possibly be enforceable," with respect to the patents under which the defendant was not licensed.⁸

In United Lens Corp. v. Doray Lamp Co., 7 Cir., 93 F.2d 969, the defendant, in connection with the grant to it of a license under one patent, agreed not to contest the validity of, and not to infringe, another patent;⁹ suit was brought to restrain infringement of this latter patent and to enforce the agreement with respect thereto. The court, apparently recognizing the inapplicability of the patent-estoppel doctrine, held invalid the patent in suit, and then, regarding the contract as one to refrain from competition in making or selling an unpatented article, decided that it was not illegal, citing cases relating to "ancillary" agreements, which are obviously not pertinent,¹⁰ and not noting the Pope Mfg. cas...