Shapiro v. General Motors Corp.

• Decision Date: 29 May 1979
• Docket Number: Civ. No. Y-71-1329.
• Citation: 472 F. Supp. 636
• Parties: Nelson H. SHAPIRO et al. v. GENERAL MOTORS CORPORATION et al.
• Court: U.S. District Court — District of Maryland

472 F. Supp. 636

Nelson H. SHAPIRO et al. v. GENERAL MOTORS CORPORATION et al.

Civ. No. Y-71-1329.

United States District Court, D. Maryland.

May 29, 1979.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Melvin J. Sykes, Baltimore, Md., and Robert H. Rines, Boston, Mass., for plaintiffs.

Paul V. Niemeyer and David F. Albright, Baltimore, Md., for defendants.

JOSEPH H. YOUNG, District Judge.

I. THE FACTS

Plaintiffs Board and Shapiro spend their spare time as inventors of automotive seat belt equipment. Plaintiff Board is a practicing psychiatrist, and Shapiro an engineer and a patent attorney. In the mid-1960s, the federal government required the installation of seat belts in all new cars sold in the U.S. market. Plaintiffs Board and Shapiro held patents relating to an automatic seat belt retractor, a device which locks seat belts into place and prevents their slippage while being worn by a passenger. In order to realize a return on their investment in the patented articles, plaintiffs sought to license the articles directly with the nation's major car manufacturers. When they approached General Motors ("GM") in 1963, George Cook, the general director of purchasing, told plaintiffs that they had to talk with Hamill Manufacturing Company ("Hamill"), one of GM's suppliers of various automotive parts. According to Cook, GM did not deal directly with outside inventors, preferring instead to route them through suppliers. Plaintiffs also met with representatives from Chrysler and American Motors and with other suppliers of seat belt equipment, including Borg-Warner, American Safety Equipment Company ("American Safety"), and Irvin Industries.

The major car manufacturers told plaintiffs that to license their seat belt retractor device, they had to negotiate directly with the suppliers rather than with the manufacturers themselves. Consequently, plaintiffs commenced licensing negotiations in 1963 with American Safety and completed these negotiations in 1965. It was in conducting these negotiations beginning in 1963 that plaintiffs first became aware of defendants' policy of requiring royalty-free second source licenses. The practice of insisting upon royalty-free second source licenses is an attempt by the car manufacturers to guarantee a steady supply of particular parts used in their automotive production lines from multiple sources. In exchange for a supplier's receiving a certain share of a car manufacturer's business for a given input, the supplier must sign an agreement releasing the car manufacturer from having to pay any item-by-item royalties on the patented products made by the supplier. The obvious effect of such a policy, regardless of whether it is devised to guarantee a steady supply or for other reasons, is to reduce to zero the royalties which the inventors eventually receive. In other words, from a purely competitive standpoint, a licensee-supplier could not expect to remain in business very long if he agreed to pay royalties to inventors where his competitors did not agree, in effect, to cut their own profits by likewise paying royalties. In concluding a licensing agreement with Hamill in 1965, plaintiffs did agree to relinquish their right to 60% of the potential royalties.

American Safety constructed and tested manufacturing prototypes of plaintiffs' inventions beginning in 1965, and plaintiffs received some $95,000, including a $25,000 down payment and minimum royalties under the licensing agreement. In 1966, however, American Safety cancelled the licensing agreement before plaintiffs' inventions were actually marketed.

Plaintiffs then renewed negotiations with Hamill in 1967 but were again confronted with a requirement for a royalty-free license provision for 50% of the procurement needs of the automobile manufacturers. No license agreement was ever concluded with Hamill.

In 1969 and 1970, plaintiffs again negotiated with Hamill to obtain licensing and to develop commercially plaintiffs' inventions. After several meetings, Hamill finally told plaintiffs that it would be economically unfeasible for them to pay plaintiffs' royalties, because Hamill would be operating at a competitive disadvantage vis-à-vis non-royalty-paying second source licensees designated by Ford and GM.

According to plaintiffs, similar negotiations with American Safety, Hamill, and Irvin Industries resulted in no licenses ever being consummated. In the case of negotiations with Irvin Industries, Irvin requested that plaintiffs agree to granting royalty-free licenses to car manufacturers for 90% of the manufacturers' procurement requirements for plaintiffs' inventions. This meant that plaintiffs would receive royalties on only 10% of their inventions. These license negotiations were also unsuccessful.

As plaintiffs conclude in their Memorandum arguing for summary judgment,

In every instance in which plaintiffs either licensed or attempted to license their inventions to a seat belt supplier of the defendants, plaintiffs were faced with a situation in which, because of the royalty-free, second-source licensing policies of the defendants, the prospect of paying reasonable royalties to plaintiffs was economically unattractive to the supplier.

Plaintiffs' Memorandum at 23.¹ On the basis of this alleged injury, plaintiffs filed a suit in this Court in 1971 against defendants GM and Ford. Contesting the legality of the royalty-free second source licensing policies, plaintiffs charged defendants with engaging in trade practices which restructured the entire industry relationship between inventors, licensee-suppliers, and the automakers. According to plaintiffs, the impact of defendants' policies not only tends to foster backward integration in the auto industry since suppliers must increasingly follow the dictates of the car manufacturers but also encourages a trend away from past practices whereby the auto industry relied heavily on various suppliers to discover inventions having new technology. Whereas at one time outside inventors were the principal sources of innovation in the automotive industry, plaintiffs contend that today any innovations come from in-house staff inventors, and the net result, aggravated by defendants' royalty policies, is to make it economically impossible for suppliers to deal with outside inventors.

Since the case was initially filed in 1971, discovery delays and numerous motions have produced seemingly unnecessary complications. While plaintiffs' theories as to patent-antitrust liability may, to some extent, be novel, the issues presented are not insurmountable. In its current posture, the case is before this Court on cross motions for partial summary judgment. Plaintiffs' complaint includes three counts: Count One alleges antitrust violations; Count Two, by reasserting the allegations of Count One, claims unfair competition; and Count Three states a claim for patent infringement. Only Counts One and Two are the subject matter of the partial summary judgment motions presented at this juncture. Claiming defendants' alleged infractions of the antitrust laws to be per se violations, plaintiffs seek both treble damages and an injunction against further violations.

Plaintiffs have moved for summary judgment pursuant to Rule 56(e) of the Federal Rules of Civil Procedure, stating that the material facts as pleaded are not in dispute. Defendants have responded but suggest that plaintiffs lack standing to pursue their claims and that plaintiffs' suit is barred by the applicable statute of limitations and the doctrine of laches.

II. EVIDENCE OF CONSPIRACY

This case presents several fascinating issues of antitrust-patent litigation.² The essence of plaintiffs' complaint is that defendants' alleged policy of requiring royalty-free second source licensing, in effect, made "the prospect of paying reasonable royalties to plaintiffs . . . economically unattractive to the supplier." Plaintiffs' Memorandum at 23. While this result hurts the plaintiffs financially, they also seek to broaden this Court's conception of the real nature of the social harm involved by stating that the overall impact of defendants' licensing policy is to damage the "market for innovation" in the entire automobile industry:

Simply stated, defendants have blocked the flow of technological improvements between plaintiffs and automobile buyers, thereby effectively restraining plaintiffs in their efforts to compete in the market for innovation in original automotive equipment.

Plaintiffs' Memorandum at 26 (emphasis added).

The complaint is artfully phrased, and reading through the various documents filed during the past seven years it becomes apparent that what is actually going on here is an attempt by plaintiffs to make some money on their invention. Both the discovery and their own admissions (see Plaintiffs' Memorandum at 20-23) indicate that they have a relatively weak record in terms of "paying" relationships with suppliers. Consequently, one might suppose that the language about the "market for innovation" is an effort by plaintiffs to temper their profitmaking motives with a general appeal to overall consumer welfare. It would seem, then, that given their theory of harm, plaintiffs have an obligation to explain how their failure to make a significant return on their investment as inventors resulted in an injury to the "market for innovation." What they appear to mean is that without a return for their efforts, they and others like them must give up inventing. As will be discussed in greater detail below, however, the antitrust laws do not automatically guarantee inventors returns for their activities.³ Insofar as the consumer welfare issue is concerned, it would seem possible for the auto manufacturers to argue that not having to pay royalties might mean lower costs to consumers. If this is so, then plaintiffs should be able to explain how losing them as innovators is more valuable to consumers than paying lower car...