SCM Corporation v. Radio Corporation of America, 65 Civ. 686.

• Decision Date: 03 October 1967
• Docket Number: 65 Civ. 686.
• Parties: SCM CORPORATION, a New York corporation, Plaintiff, v. RADIO CORPORATION OF AMERICA, a Delaware corporation, Defendant.
• Court: U.S. District Court — Southern District of New York

276 F. Supp. 373

SCM CORPORATION, a New York corporation, Plaintiff, v. RADIO CORPORATION OF AMERICA, a Delaware corporation, Defendant.

65 Civ. 686.

United States District Court S. D. New York.

October 3, 1967.

Pennie, Edmonds, Morton, Taylor & Adams, New York City, for plaintiff. Frank F. Scheck, New York City, of counsel.

William K. Kerr, New York City, for defendant. Lawrence J. McKay, New York City, of counsel.

OPINION

McLEAN, District Judge.

The second amended complaint in this action contains three counts. The first seeks a declaratory judgment that patents No. 2,922,883, 3,052,539 and 3,052,540, owned by defendant, relating to electrostatic photocopy machines and coated copy paper used therewith, are invalid and not infringed by plaintiff. In addition to allegations of invalidity which are common to all three patents, i. e., lack of invention, obviousness, lack of definiteness, and misuse by defendant, the complaint alleges with respect to patent No. 3,052,539 that it was procured by defendant by willful fraud upon the Patent Office. Defendant's answer alleges a first counterclaim seeking a determination that all three patents are valid and that plaintiff has infringed them. Plaintiff's first count and defendant's first counterclaim are not involved on these motions.

Plaintiff's second and third counts relate only to patent No. 3,052,539. The second count alleges in substance that defendant induced plaintiff to accept a license under this patent, a license which plaintiff later terminated, by threatening to sue plaintiff for infringement and by fraudulently "concealing from plaintiff material facts" and "making material misrepresentations of fact." The complaint does not state what the material facts were that defendant allegedly concealed and misrepresented. On the strength of these allegations, plaintiff seeks restitution of the royalties, amounting to something in excess of $465,000, which it paid to defendant under the license prior to its termination.

Jurisdiction of this court over this count is alleged to rest on 28 U.S.C. § 1332, the diversity of citizenship section. In its answer defendant denies jurisdiction. Since the complaint appears to allege that both plaintiff and defendant are New York citizens, the court is perplexed as to what plaintiff's theory of jurisdiction may be. Although the point has not been raised on this motion, the court requests further information on it from plaintiff, for if in fact the court does not have jurisdiction of this count, the court is duty bound to dismiss it.

The third count is an antitrust claim of the type inspired by Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 86 S.Ct. 347, 15 L.Ed.2d 247 (1965). The complaint charges that defendant has "monopolized interstate commerce in the electrostatic photocopy field" by asserting its patent No. 3,052,539 in a licensing program, despite the fact that defendant procured the patent by means of willful fraud upon the Patent Office. It charges that in its licensing program defendant has fraudulently concealed and fraudulently misrepresented "the same or similar" facts which defendant concealed from and misrepresented to the Patent Office. It alleges that plaintiff has been damaged by this monopoly in that plaintiff paid royalties to defendant prior to plaintiff's termination of the license, and in that plaintiff has incurred expense in maintaining this action. The complaint seeks recovery of "treble damages" by which plaintiff apparently means three times the royalties paid and literally, although perhaps this was not intended, three times its attorneys' fees.

Defendant has pleaded as an affirmative defense to the second and third count (not to the first) of the complaint that "plaintiff is guilty of unclean hands for the reasons set forth hereinafter in RCA's Second Counterclaim." Defendant's second counterclaim is an action brought under Sections 4 and 16 of the Clayton Act (15 U.S.C. §§ 15, 26). It charges that plaintiff has violated Section 2 of the Sherman Act and Section 3 of the Clayton Act.

Plaintiff has moved to strike the affirmative defense and to dismiss the second counterclaim on the ground that each is insufficient in law. In the alternative, plaintiff has moved under Rule 42(b) for a separate trial of certain of the issues in this complex litigation.

Since defendant's affirmative defense of "unclean hands" merely incorporates by reference the allegations of the second counterclaim, it is necessary, in determining the sufficiency of the defense as well as of the counterclaim, to examine these allegations with care. They cover sixteen pages. They are ingenious as well as lengthy. Of course, on this motion these allegations, in so far as they purport to allege facts, must be assumed to be true. They may be briefly summarized as follows:

RCA is the originator of the Electrofax process, is the owner of the three patents above mentioned relating to the process and to the machines and coated papers which carry it out, and by reason of that ownership, is "the sole lawful monopolist" of that process. RCA does not manufacture either the machines or the paper. It has offered non-exclusive licenses under its patents to anyone, whether machine manufacturer or paper manufacturer, who wants one. It now has some 63 licenses outstanding under which it receives royalties, based upon a percentage of each licensee's selling price of the machines or paper.

The sale and leasing of machines and the sale of paper constitute a substantial part of interstate and foreign commerce. Beginning in 1959 and continuing to the present, plaintiff has monopolized a substantial part of this commerce, in violation of Section 2 of the Sherman Act. It has also leased and sold Electrofax machines on condition that the purchaser shall not buy or use goods of plaintiff's competitors, in violation of Section 3 of the Clayton Act. The monopoly has manifested itself in a variety of unlawful acts engaged in by plaintiff, including, among others, hiring away competitors' employees, some of whom were familiar with defendant's process, acquiring the assets of one of defendant's former licensees, requiring licensees of plaintiff's machines to obtain their requirements of paper from plaintiff, refusing to sell plaintiff's newest model of machine and requiring customers to lease it, offering service contracts containing illegal "tie-in" clauses, and refusing to sell replacement parts for its machines to its competitors.

Plaintiff has thereby acquired a "dominant position" in the market. In so doing, it has made use of defendant's research and development. Plaintiff has "willfully abused" that dominant position to eliminate defendant's position as "the only lawful monopolist in the Electrofax field." It has used its dominant position "to confront RCA with a market dominated by only one possible licensee of its patents." Plaintiff has done this in the following manner:

While plaintiff was a licensee under certain claims of defendant's patent No. 3,052,539, plaintiff demanded that defendant grant it a "discriminatory" reduction in royalty rates. It also demanded, with respect to Electrofax paper, that defendant license its patents only to paper manufacturers, not to machine manufacturers such as plaintiff, and that defendant require the paper manufacturers to execute a "compulsory package license." Defendant refused to accede to these demands, whereupon plaintiff terminated its license agreement with defendant and began this action, "thereby attempting to evoke and obtain the aid of this court to implement and assist it in the furtherance of the unlawful offenses" previously alleged.

The result of all this has been that competition in the sale and leasing of machines and in the sale of paper has been restrained, and defendant has been injured in that it has been deprived of royalties "lawfully due and owing from plaintiff" and has been put to the expense of defending this action. Moreover, defendant has been "threatened with loss" in that it has been prevented from making license agreements with persons who, but for plaintiff's behavior, would have gone into the Electrofax business and would have taken licenses from defendant, and defendant has been prevented from enjoying the full benefit of its patents in that, because of plaintiff's behavior, defendant's licensees have been deterred from promoting defendant's invention as they otherwise would have.

The relief asked is an injunction and damages "in excess of $1,000,000" and that these damages be trebled. Here again, as in the case of plaintiff's complaint, defendant appears to be seeking recovery of three times its attorneys' fees.

In determining the sufficiency of defendant's affirmative defense and counterclaim, it will be helpful to consider the counterclaim first. Of course, the fact that defendant has asserted its antitrust charges in a counterclaim rather than in an independent action is immaterial, as far as the legal sufficiency of those charges is concerned.

Section 4 of the Clayton Act (15 U.S.C. § 15) provides that a treble damage action may be maintained by "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws." Section 16 of the Clayton Act (15 U.S.C. § 26) provides that any person may sue for injunctive relief "against threatened loss or damage by a violation of the antitrust laws." Neither party claims that the test of standing to sue for injunctive relief differs from the test of standing to sue for treble damages. I shall assume that the question is the same, regardless of the type of relief requested, and that the inclusion of a prayer for injunctive relief in the present pleading does not differentiate this case from those decided cases which are concerned primarily with treble damage actions.

The question is whether defendant, on the allegations of its counterclaim,...