Oxford Varnish Corporation v. Ault & Wiborg Corporation

• Decision Date: 08 May 1936
• Docket Number: No. 7005.,7005.
• Citation: 83 F.2d 764
• Parties: OXFORD VARNISH CORPORATION et al. v. AULT & WIBORG CORPORATION.
• Court: U.S. Court of Appeals — Sixth Circuit

83 F.2d 764 (1936)

OXFORD VARNISH CORPORATION et al. v. AULT & WIBORG CORPORATION.^*

No. 7005.

Circuit Court of Appeals, Sixth Circuit.

May 8, 1936.

Samuel E. Darby, Jr., of New York City (Bates, Golrick & Teare and Albert R. Golrick, all of Cleveland, Ohio, on the brief), for appellants.

Edmund P. Wood, of Cincinnati, Ohio (Arthur M. Smith, of Detroit, Mich., and Truman A. Herron and Wood & Wood, all of Cincinnati, Ohio, on the brief), for appellee.

Before MOORMAN, HICKS, and SIMONS, Circuit Judges.

SIMONS, Circuit Judge.

The appeal challenges the validity of a final decree in an equity suit granting injunctive relief against the appellants under section 16 of the Clayton Act (15 U.S. C.A. § 26), for alleged violations of section 3 of that act (15 U.S.C.A. § 14), and sections 1 and 2 of the Sherman Anti-Trust Act (15 U.S.C.A. §§ 1, 2).

Section 1 of the Sherman Anti-Trust Act declares every contract in restraint of trade or commerce among the states to be illegal. Section 2 imposes a penalty upon every person who shall monopolize or attempt to monopolize any part of the trade or commerce among the several states. Section 3 of the Clayton Act declares it to be unlawful for any person engaged in commerce to lease or make a sale or contract for the sale of goods, wares, merchandise, machinery, supplies, or other commodities, whether patented or unpatented, "where the effect of such lease, sale, or contract for sale or such condition, agreement or understanding may be to substantially lessen competition or tend to create a monopoly in any line of commerce." Section 16 of the Clayton Act gives to private persons, firms, or corporations the right to sue for injunctive relief against threatened loss or damage by a violation of the anti-trust laws, including the sections herein referred to, when and under the same conditions and principles as injunctive relief against threatened loss or damage is granted by courts of equity.

The appellant Oxford Varnish Corporation owns and controls patents for a process of applying to metal or other surfaces a graining simulating the color and appearance of natural wood grains. Chief among these patents is Henry, No. 1,548,465, which is for a process of making graining plates. The appellant Vance Manufacturing Company is a wholly owned subsidiary of Oxford, still retaining its corporate identity but now dormant. The appellee is a corporation engaged in the manufacture of standard paints, varnishes, lacquer, and the like, and as plaintiff below invoked section 16 of the Clayton Act.

It was Oxford's practice to manufacture the plates and lease them to licensees under its patents upon a royalty based upon the amount of finished product produced by them. The materials used in the graining process consist of a primer, or bottom coat of varnish or paint, a graining ink or paste, and a top or finishing coat. These materials Oxford manufactures, and in its several forms of contract with licensees it included covenants to compel or to make desirable the purchase of its own graining materials. It is the validity of these covenants that the plaintiff assails, on the ground that they substantially lessen competition and tend to create monopoly, to its irreparable damage as a competitor.

Oxford justifies its business practice on the ground that in the use of its patented plates by licensees the materials must be adapted to the requirements of each individual customer; that there is something special in each installation; that to meet this need, encountered at the outset, it organized a technical staff which by experiment and research developed the particular technique and treatment found to be necessary in each operation; that it has developed hundreds of different kinds of graining pastes, ground coats and top coats; that it does not charge its customers for the service, but receives compensation for its development work through the lease of the graining plates and the sale of the materials developed for each particular need; that in any event its business in relation to the total volume of the paint and varnish business of the country is so infinitesimal that it cannot be said by its practice to substantially lessen competition or tend to create a monopoly, and so does not offend against the statute.

The court found, however, that the plaintiff and others in similar business are able to furnish priming coats, graining pastes, and finishing coats as efficient as those produced by Oxford, accomplishing the same purposes and in no way impairing the usefulness of the patented processes or plates. We are unable to say upon this record that such finding is not supported by preponderance of evidence,¹ and giving it such weight as is usually given to the factual conclusions of the court which hears and sees the witnesses, it is accepted as the basis for considering the legal issues involved.

Four forms of license agreement were employed. The first three are substantially identical. While the wording varies, the licensee in each expressly binds himself to purchase supplies from Oxford exclusively during the term of the agreement. The fourth form is a departure from the others. By it the licensee agrees to pay Oxford a royalty of one cent for each square foot of surface finished by the use of the patented processes, machinery, or equipment, when all materials utilized are purchased from Oxford, but a royalty of three cents for each square foot when it desires to use the patents with material purchased from others. The significance of the increased royalty, aptly designated below as a penalty royalty, is demonstrated by unchallenged evidence to add $2.07 to the cost of each gallon of material used in the licensed process. The court found such penalty to be so prohibitive in its effect as to compel licensees to purchase supplies from Oxford. With this conclusion we must agree, and so agreeing, we find no material difference in the various forms of contract employed. They are either all valid or equally invalid.

It is clearly settled that the limited monopoly granted by a patent to make, use, and vend an article may not be "expanded by limitations as to materials and supplies necessary to the operation of it." Motion Pictures Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 515, 37 S.Ct. 416, 420, 61 L.Ed. 871, L.R.A.1917E, 1187, Ann. Cas.1918A, 959; Carbice Corp. v. American Patents Corp., 283 U.S. 27, 31, 51 S.Ct. 334, 75 L.Ed. 819; Morgan Envelope Co. v. Albany Perforated Wrapping Paper Co., 152 U.S. 425, 433, 14 S.Ct. 627, 38 L.Ed. 500; Sturgis Register Co., et al., v. Autographic Register Co., 73 F.(2d) 883, 885 (C.C.A. 6). Cf. Kodel Electric & Mfg. Co. v. Warren, 62 F.(2d) 692 (C.C.A.6). But that which the patent law does not authorize the Clayton Act specifically forbids. It applies to goods, wares, machinery, etc., whether patented or unpatented. "This provision was inserted in the Clayton Act with the express purpose of preventing rights granted by letters patent from securing immunity from the inhibitions of the act." United Shoe Machinery Co. v. United States, 258 U.S. 451, 460, 42 S.Ct. 363, 366, 66 L.Ed. 708; cf. Standard Fashion Co. v. Magrane-Houston Co., 258 U.S. 346, 42 S.Ct. 360, 66 L.Ed. 653; Lord v. Radio Corp. of America (D.C.) 24 F.(2d) 565, affirmed, 28 F.(2d) 257 (C. C.A.3), cert. denied 278 U.S. 648, 49 S.Ct. 83, 73 L.Ed. 560.²

The appellant, however, contends that it may not be brought within the condemnation of the Clayton Act unless the contracts complained of...