SCM Corp. v. Xerox Corp.

• Decision Date: 12 March 1981
• Docket Number: No. 14,D,14
• Citation: 645 F.2d 1195,209 USPQ 889
• Parties: , 1981-1 Trade Cases 63,876 SCM CORPORATION, Plaintiff-Appellant, v. XEROX CORPORATION, Defendant-Appellee. ocket 79-7017.
• Court: U.S. Court of Appeals — Second Circuit

Page 1195

645 F.2d 1195

209 U.S.P.Q. 889, 1981-1 Trade Cases 63,876

SCM CORPORATION, Plaintiff-Appellant, v. XEROX CORPORATION, Defendant-Appellee.

No. 14, Docket 79-7017.

United States Court of Appeals Second Circuit.

Argued Sept. 17, 1980.

Decided March 12, 1981.

Gordon B. Spivack, New York City (David H. Marks, Jonathan M. Jacobson, Stephen R. Lynch, Lord, Day & Lord, New York City, Ira B. Grudberg, David L. Belt, Jacobs, Jacobs & Grudberg, P. C., New Haven, Conn., Jerome Gotkin, W. Thomas Fagan, Widett, Slater & Goldman, P. C., Boston, Mass., Bernard J. Nussbaum, Harold C. Hirshman, Sonnenschein, Carlin, Nath & Rosenthal, Chicago, Ill., of counsel), for plaintiff-appellant.

Stanley D. Robinson, New York City (Milton Handler, Michael Malina, Allen Kezsbom, Gerald Sobel, Randolph S. Sherman, Kaye, Scholer, Fierman, Hays & Handler, New York City, Robert S. Banks, Xerox Corporation, Stamford, Conn., of counsel), for defendant-appellee.

Before WATERMAN, FRIENDLY and MESKILL, Circuit Judges.

MESKILL, Circuit Judge:

The plaintiff, SCM Corporation (SCM), appeals from an order entered in the United States District Court for the District of Connecticut, Jon O. Newman, Judge, dismissing its claim for monetary damages asserted in this private antitrust action for injuries sustained as a result of alleged exclusionary acts committed by the defendant, Xerox Corporation (Xerox), in violation of §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2 (1976), and § 7 of the Clayton Act, 15 U.S.C. § 18 (1976). The trebled amount of damages calculated by the jury on this claim totalled $111.3 million. The principal anticompetitive acts alleged by SCM concerned patent acquisitions made by Xerox. SCM averred that Xerox's acquisition of certain patents and subsequent refusal to license those patents excluded SCM from competing effectively in a relevant product market and submarket dominated by Xerox products that embraced the patented art. Judge Newman ruled below that a need to accommodate the antitrust and patent laws precluded damage liability predicated upon Xerox's refusal to license its patents; however, he left open the possibility of granting the plaintiff equitable relief. Judge Newman certified his order for interlocutory review pursuant to 28 U.S.C. § 1292(b) (1976) and, as developed below, we exercised our discretion under that section to accept this appeal. Without commenting upon Judge Newman's remedial theory, we affirm the denial of monetary damages in connection with SCM's exclusionary claim based upon our determination that none of Xerox's patent-related conduct, the only conduct alleged by SCM to have caused it any harm, contributed to any antitrust violation.

SCM also appeals from a judgment entered pursuant to Rule 54(b), 28 U.S.C., Fed.R.Civ.P. 54(b) (1976), dismissing its claim for monetary damages based upon injuries sustained as a result of certain marketing programs it alleged violated § 2 of the Sherman Act and § 3 of the Clayton Act, 15 U.S.C. § 14 (1976). Judge Newman held that this claim could not support an award of damages because "the jury (had not been) given a rational basis for approximating" the damages incurred by SCM. 463 F.Supp. 983, 1019. We affirm Judge Newman's decision.

BACKGROUND

Chester Carlson The Inventor

In the 1930s, a patent attorney turned inventor, named Chester Carlson, invented a process, subsequently called xerography, that within two decades would revolutionize the document reproduction industry. The xerographic process is described in Judge Newman's opinion below, reported at 463 F.Supp. 983.

Two adaptations of the xerographic process are particularly relevant to this case. The first is electrofax copying, a process which involves the reproduction of images on paper coated with zinc-oxide. The second, xerography in the reusable mode, is a more complex process which permits images to be reproduced on plain paper.

The significance in distinguishing between coated-paper copying and plain-paper copying is that Xerox, which later came to control Carlson's patents and all of the xerographic improvement patents, agreed to grant licenses for coated-paper copying but refused to grant licenses for plain-paper copying. The result was that from 1960 until 1970, when IBM introduced its first plain-paper copier, Xerox enjoyed an absolute monopoly in the plain-paper copying segment of the industry.

Both the plain- and coated-paper copiers were introduced into a market that formerly had been limited to machines that employed "duplicating" processes as opposed to the "copying" processes just described. The principal duplicating processes then in use were offset, spirit, and mimeograph, all of which were developed around the turn of the century. The duplicating processes all had one common characteristic they required the preparation of a master or stencil. Ultimately the copying machines formed a discrete market in which the duplicating machines could not effectively compete; however, precisely when that even occurred was not determined by the jury below.

The Carlson-Battelle Relationship

Chester Carlson, from 1940 to 1944, made eighteen attempts to find a commercial backer for his invention. Carlson was turned down by IBM on three separate occasions, two of which involved an offer by Carlson to sell exclusive rights to all of his patents. Finally, in 1944, Carlson entered into an agreement with Battelle Memorial Institute (Battelle), a non-profit research organization self-described as "in the business of developing and improving technical inventions and in selling the rights thereon when patented." Pursuant to this agreement, Battelle received an exclusive license under Carlson's patents; a wholly owned subsidiary, Battelle Development Corp. was designated as Carlson's exclusive licensing agent; and Battelle agreed to pay Carlson forty percent of any royalties it might receive. Subsequently, Carlson formally assigned his patents to Battelle. Thereafter, Battelle secured patents covering many improvements it invented in the xerographic process that would prove to be of vital importance to the production of an automatic plain-paper copier.

The Xerox-Battelle Agreements

Between 1944 and 1947 Battelle experienced difficulty, as had Carlson, in its efforts to secure financial backing. Carlson and Battelle approached thirty-six companies, including IBM, but none was sufficiently interested. In 1946 the Haloid Company of Rochester, New York (later renamed and hereinafter referred to as Xerox) approached Battelle and offered its assistance in the commercialization of xerography. During the next ten years, the parties entered into a series of four basic agreements pursuant to which Xerox acquired complete title to the Carlson-Battelle patents and exclusive domain over the plain-paper copying industry. We describe these agreements in some detail.

The first agreement between Xerox and Battelle, executed in 1947, denied Xerox the exclusive license it sought and instead gave it a non-exclusive license covering limited applications of xerography. Xerox agreed to pay Battelle an eight percent royalty and to sponsor $25,000 of xerographic research at Battelle a year. The license was limited to patented inventions that would produce up to twenty copies of a document. Xerox also agreed to grant back to Battelle royalty-free rights on any xerographic patents it might obtain in connection with its own or sponsored research. Finally, Battelle agreed, as was its usual practice, not to work for another company in the xerographic field occupied by Xerox for the term of the agreement.

The second agreement, executed in 1948, granted Xerox an exclusive license to the Carlson-Battelle patents, on the condition that Xerox "use diligent efforts to secure sublicensees to engage in research, development and commercialization of the inventions and patents" involved. Additionally, the 20-copy limitation was removed from the license agreement, affording Xerox more latitude in its efforts to exploit the commercial potential of xerography.

The third agreement, executed in 1951, continued Xerox's obligation to use diligent efforts to seek sublicensees, but extended the scope of the license, which under the 1947 and 1948 agreements had been limited to use in the United States, to include use worldwide. Additionally, all remaining limitations on the fields in which Xerox could practice xerography under the 1948 agreement were removed.

Before discussing the fourth agreement executed by the parties in 1956, which is central to SCM's claims in this case, it is necessary to describe the circumstances of the parties and the market at that time. By the early 1950s Xerox had experienced success in two commercial applications of xerography. One machine, a flat-plate copier, which required twenty manual steps and three or four minutes to produce a single copy, found some market acceptance for preparing paper masters for offset duplicators. Another machine, the "Copyflo," a huge machine weighing approximately one ton, achieved substantial success in printing microfilm. By 1956, Xerox was deriving forty percent of its profit from its xerographic products. SCM does not contend that either of these products found commercial acceptance as convenience office copiers, the product market that SCM claims Xerox dominated for over a decade. Nevertheless, there is evidence in the record tending to prove that Xerox possessed the technology in 1955 to manufacture an automatic plain-paper copier, and that Xerox speculated that the value of even a non-exclusive license of its xerographic patents was worth $70 million. Despite its continuing obligation under the 1948 and 1951 agreements to secure sublicensees, Xerox turned down license requests from such potential competitors as IBM, which by then apparently had formed a different opinion concerning the commercial feasibility of xerography. Although the record is not clear, it...