Quick Point Pencil Co. v. Aronson

• Decision Date: 04 January 1978
• Docket Number: No. 77-1142,77-1142
• Citation: 567 F.2d 757
• Parties: QUICK POINT PENCIL COMPANY, a Missouri Corporation, Appellant, v. Jane ARONSON (formerly known as Jane Leopoldi), Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 757

567 F.2d 757

196 U.S.P.Q. 281

QUICK POINT PENCIL COMPANY, a Missouri Corporation, Appellant, v. Jane ARONSON (formerly known as Jane Leopoldi), Appellee.

No. 77-1142.

United States Court of Appeals,

Eighth Circuit.

Submitted Oct. 14, 1977.

Decided Dec. 8, 1977.

Rehearing and Rehearing En Banc Denied Jan. 4, 1978.

Thomas E. Wack, St. Louis, Mo., for appellant; Walter M. Clark, Fred Leicht, Jr., and William J. Travis, St. Louis, Mo., on brief.

Robert E. Knechtel, Dominik, Knechtel, Godula & Demeur, Chicago, Ill. (argued), Mark T. Keaney, Lewis, Rice, Tucker, Allen & Chubb, St. Louis, Mo. and Alan B. Samlan, Chicago, Ill., on brief, for appellee.

Before LAY and ROSS, Circuit Judges, and LARSON, Senior United States District Judge. ^*

ROSS, Circuit Judge.

Quick Point Pencil Company, a Missouri corporation, brought this action for declaratory judgment, naming Jane Aronson, an Illinois resident, as defendant. The amount in controversy exceeded the statutory $10,000 and the district court had jurisdiction pursuant to 28 U.S.C. § 1332. ¹ As the basis for the action, Quick Point alleged a contract between the parties negotiated in June and July of 1956, wherein Aronson granted Quick Point an exclusive license to manufacture and sell a keyholder for which Aronson (formerly Jane Leopoldi) had submitted a patent application, Serial No. 542,677, on October 25, 1955. In exchange for the exclusive license Quick Point promised to pay Aronson a five percent royalty, to be reduced to two and one-half percent if no patent were granted within five years. Quick Point agreed to pay these royalties for as long as it continued to manufacture and sell the keyholders. Aronson never obtained a patent on the keyholder but Quick Point paid royalties under the agreement until October of 1975, ² for a total of $203,963.84.

In its complaint Quick Point alleged that the license agreement, providing for royalties on an unpatented and unpatentable article for an indefinite duration, conflicted with article I, section 8, clause 8 of the United States Constitution, ³ and the Supremacy Clause. ⁴ It sought declarations that the agreement was unenforceable and that it had no further liability to make royalty payments under the license. After the parties filed a joint stipulation of uncontested facts and cross-motions for summary judgment, the district court took the case under submission without trial.

On December 29, 1976, the district court ordered, adjudged and decreed that the contract is valid and enforceable and Quick Point has the continuing liability to make royalty payments for as long as it manufactures the keyholders. He concluded that "(t)he language of the agreement is plain, clear and unequivocal and has no relation as to whether or not a patent is ever granted or is not granted." Quick Point Pencil Co. v. Aronson, No. 75-1056C(1), 425 F.Supp. 600 (E.D.Mo., filed Dec. 29, 1976). He determined that this case is not controlled by Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. 234, 84 S.Ct. 779, 11 L.Ed.2d 669 (1964); Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 84 S.Ct. 784, 11 L.Ed.2d 661 (1964); nor Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969). Quick Point appeals from that judgment.

Quick Point contends that the district court erred in holding that this case is governed solely by contract law without regard for federal patent and antitrust considerations. It argues that the principles set forth in Lear, Inc. v. Adkins, supra, should be controlling here. Aronson contends that the contract contains an unequivocal promise to pay a royalty which is independent of the existence of a patent and enforceable as long as Quick Point continues to manufacture the keyholder.

The issue we must decide is whether Quick Point, a patent application licensee, is bound by the contractual provision requiring it to pay royalties for as long as it manufactures the item described in the patent application even though the licensor abandoned the application many years ago and the licensee's competitors are freely manufacturing the unpatented item. ⁵ We believe it is not so bound and reverse the district court's judgment.

The issue involves the relationship between state contract law and federal patent law. Although the Supreme Court has not decided the precise question, it has dealt with the conflict in similar contexts and has established principles that can be applied here.

We begin with the principle that federal law requires that all ideas in general circulation be dedicated to the common good unless they are protected by a valid patent. See Lear, Inc. v. Adkins, supra, 395 U.S. at 656, 89 S.Ct. 1902; Sears, Roebuck & Co. v. Stiffel Co., supra, 376 U.S. at 232-33, 84 S.Ct. 784; Compco Corp. v. Day-Brite Lighting, Inc., supra, 376 U.S. at 238, 84 S.Ct. 779. In Sears the Court made the following statement concerning the relationship between state laws on unfair competition and the federal patent laws:

To allow a State by use of its law of unfair competition to prevent the copying of an article which represents too slight an advance to be patented would be to permit the State to block off from the public something which federal law has said belongs to the public. The result would be that while federal law grants only 14 or 17 years' protection to genuine inventions, see 35 U.S.C. §§ 154, 173, States could allow perpetual protection to articles too lacking in novelty to merit any patent at all under federal constitutional standards.

376 U.S. at 231-32, 84 S.Ct. at 789.

We believe this principle applies to a state's contract law as well as to state unfair competition laws, at least when a patent application is involved. Further support for this belief is found in Lear, Inc. v. Adkins, supra, 395 U.S. at 677, 89 S.Ct. at 1914 (Black, J., joined by Warren, C. J., and Douglas, J., concurring in part and dissenting in part):

The national policy expressed in the patent laws, favoring free competition and narrowly limiting monopoly, cannot be frustrated by private agreements among individuals, with or without the approval of the State.

In Lear a patent licensee attempted to defend a suit for royalties by challenging the validity of the underlying patent. The situation was similar to the one involved here. While the patent application was pending the inventor and the manufacturer contracted for an exclusive license-royalty arrangement. Before the patent was allowed the manufacturer discontinued the royalty payments because it believed that the improvements were not sufficiently novel and that the inventor would never be able to obtain a patent. ⁶ The patent office did grant a patent and the inventor sued for royalties. The Supreme Court of California refused to allow the manufacturer's patent invalidity defense holding that it was estopped by the contract to make that challenge. Finding that such a rule would significantly frustrate overriding federal policies, the United States Supreme Court reversed.

Under the rule announced in Lear, if Aronson had obtained a patent which was later determined to be invalid, Quick Point's liability would have terminated. ⁷ In fact Quick Point could have challenged the validity of the patent and suspended payment of royalties while making the challenge. See Lear, Inc. v. Adkins, supra, 395 U.S. at 674, 89 S.Ct. 1902.

Although Aronson's position is different than the inventor's in Lear because no patent was granted here, we believe, as the Supreme Court did, that "enforcing this contractual provision would undermine the strong federal policy favoring the full and free use of ideas in the public domain." Id. at 674, 89 S.Ct. at 1913.

Two other Supreme Court decisions lend support to our conclusion. In Brulotte v. Thys Co., 379 U.S. 29, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964), the Court held: "(A) patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se." Id. at 32, 85 S.Ct. at 179. So if Aronson had obtained the patent for which she applied, after 17 years the contract with Quick Point would have been invalid and Quick Point's liability for royalties terminated.

In Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974), the Supreme Court faced another situation involving a conflict between state trade secret law and federal patent policies. In holding that state trade secret laws may protect unpatented but clearly patentable inventions without conflicting with the patent law policy of disclosure, the Supreme Court stated:

The possibility that an inventor who believes his invention meets the standards of patentability will sit back, rely on trade secret law, and after one year of use forfeit any right to patent protection, 35 U.S.C. § 102(b), is remote indeed.

Id. at 490, 94 S.Ct. at 1890.

Not only did Aronson not rely on trade secret protection, it is doubtful that her keyholder would have been entitled to any such protection. The Court stated:

A trade secret law, however, does not offer protection against discovery by fair and honest means, such as by independent invention, accidental disclosure, or by so-called reverse engineering, that is by starting with the known product and working backward to divine the process which aided in its development or manufacture.

Id. at 476, 94 S.Ct. at 1883 (footnote omitted).

Any member of the general public could have inspected Aronson's keyholder in an attempt to determine how to manufacture it. ⁸ See Sears, Roebuck & Co. v. Stiffel Co., supra, 376 U.S. at 231-32, 84 S.Ct. 784. Aronson did not take this chance. She applied for a patent, contracted with regard to that patent application, ⁹ and cannot now argue that patent law principles are irrelevant to this case. ¹⁰

Aronson believed her invention was patentable and she submitted a patent application. Had a patent issued she would have had 17 years of exclusive rights to her invention before...