Timken-Detroit Axle Co. v. Alma Motor Co., 198.

• Decision Date: 23 September 1942
• Docket Number: No. 198.,198.
• Citation: 47 F. Supp. 582
• Parties: TIMKEN-DETROIT AXLE CO. v. ALMA MOTOR CO.
• Court: U.S. District Court — District of Delaware

47 F. Supp. 582

TIMKEN-DETROIT AXLE CO. v. ALMA MOTOR CO.

No. 198.

District Court, D. Delaware.

September 23, 1942.

William A. Strauch, James A. Hoffman, J. Matthews Neale, and Strauch & Hoffman, all of Washington, D. C., and E. Ennalls Berl and Southerland, Berl & Potter, all of Wilmington, Del., for plaintiff.

S. Samuel Arsht, of Wilmington, Del., and George Rex Frye, of Detroit, Mich., for defendant.

KIRKPATRICK, District Judge.

In this action the plaintiff, under the Declaratory Judgment Act, asks the Court to determine certain questions of law and fact, arising in connection with the defendant's patent No. 2,173,044 (issued to Ruggles and Smith September 12, 1939) and an agreement by which the plaintiff became a licensee. The patent is for mechanism known as a transfer case — an auxiliary transmission by which the drive of the engine of an automobile truck may be extended to the front axle as well as to the rear. In substance, the relief asked for is that the Court declare that the patent is invalid, that the transfer cases manufactured by the plaintiff do not come within its claims as construed in the light of the prior art, and that, under the license agreement or, in spite of it, the plaintiff is not bound to pay royalties upon any of the transfer cases now being manufactured by it. The defendant has counterclaimed asking judgment for damages for the plaintiff's failure to pay royalties.

In the early part of 1938, the plaintiff, Timken, the defendant, Alma, and a third company, Harrington, were in interference, each with a patent application for a transfer case. The three devices were essentially the same and there were 15 counts in the interference. After some preliminary sparring in the Patent Office, there was a meeting between representatives of the three parties at the Book-Cadillac Hotel in Detroit in May 1938 at which it was agreed that Alma should have the patent and would license the other two when it issued. There are some indications of a general feeling that the patent, even if valid, would not be of outstanding importance and that its ownership was not worth litigating. After the conference, Timken and Harrington formally conceded priority to Alma, Alma disclaimed certain counts of the interference which the parties had agreed were anticipated by prior art which had been produced and studied at the conference, and Alma and Timken executed the license agreement in question, Harrington dropping out because it had come to the conclusion that it did not want to manufacture the cases.

There were actually two contract documents executed, the first on May 16, 1938 and the second on May 26, 1938, but I think they may be considered together as though they were a single license agreement. The second embodied the essential terms of the first, and the parties are apparently in agreement that the recitals in the earlier document should be considered in determining the scope and construction of the later one.

The first question is whether or not Timken is estopped to contest the validity of the patent. I am of the opinion that it is estopped to raise that issue, and therefore will not adjudicate the patent in this proceeding.

The rule that a licensee may not contest the validity of the patent under which he is licensed is well settled and has long been a part of the patent law. In this case Timken endeavors to avail itself of several avenues of escape from the estoppel.

First, Timken contends that this license, by its terms as interpreted in the light of the recitals, intends that the licensee shall be free to contest the patent. I do not so read the agreement. The contention is based on the first recital of the agreement of May 16 and on Clause IV of the second document, which is practically identical with Clause VI of the first document.

The recital, of course, was intended to define the subject matter. It is a statement that Ruggles and Smith have invented certain improvements, which improvements are further described as transfer cases and identified as the ones disclosed in the Ruggles and Smith application then pending. Then Alma licenses Timken to make, etc., "the said improvements" and Timken agrees to pay royalties upon transfer cases "embodying said improvements." Then there is a clause the meaning of which is that, after the issuance of the patent, the royalties shall be paid only if any of the claims dominate the transfer cases made by Timken. I think it perfectly plain that the intention was to pay royalties on transfer cases coming within the terms of the claims of the patent as issued. I do not think that the incidental use of the word "invented" meant that it was intended the licensee was to be free to contend that his obligation to pay royalties was not coextensive with the issued patent as defined by its claims. Five patent lawyers participated in the conference, and at least two in drawing the agreement. They understood the rule that estops a licensee and certainly would have provided against it in plainer terms than these had that been the intention of the parties. But even if it were possible, by emphasis upon the word "invented", to whittle down the scope of the license to something less than the patent, I should say that the recital estopped Timken to deny that Ruggles and Smith had invented the improvements just as much as the license estops it to contest the validity of the patent.

The assertion in Timken's brief that Alma represented that Ruggles and Smith invented the improvements in question is not entirely correct. Actually, it was as much Timken's assertion as Alma's. Both parties executed the agreement and both agreed to the recital. They had before them practically the same prior art which was presented at the hearing. As a matter of fact Timken's lawyers knew more about the prior art than Alma did, an important use having been shown to Alma's counsel, for the first time, only a few hours before the conference.

The clause referring to the issuance of a patent with claims dominating transfer cases made by Timken seems to have been inserted, from an excess of caution, to be sure that "said improvements" could not possibly be construed to cover any improvements disclosed by the pending application which might be eliminated or extensively modified in the issued patent. If anything, this clause only serves to make stronger the inference that the subject matter of the license was improvements as described in the patent claims.

The provision contained in Clause IV does not permit the licensee to contest the validity of the patent. This point is settled by the decision of the Supreme Court of United States v. Harvey Steel Co., 196 U. S. 310, 25 S.Ct. 240, 49 L.Ed. 492.

Another ground for Timken's contention that it is not estopped is the public interest involved in any adjudication involving the validity of the patent. There have been cases in which public interest has been said to be a justification for allowing a licensee to contest validity but, as pointed out by this Court in Crom v. Cement Gun Company, 46 F.Supp. 403, in an opinion filed June 25, 1942, but not yet reported, this is only in exceptional cases. Such a case was Standard Water, etc., v. Griscom-Russell Co., 3 Cir., 278 F. 703. That decision as pointed out by this Court in the Crom case did not change the general rule for the Third Circuit. I find no circumstances in the present action which requires a consideration of the validity of this patent in the public interest. I am not adjudicating its validity. I am merely holding that this plaintiff may not contest it, and I do not think the public is interested in whether Timken pays royalties to Alma or not, which is the only thing at issue here. I might go further and say that an issue which the party who attempts to raise it is estopped to contest does not present a justiciable controversy under the Declaratory Judgment Act, 28 U.S.C.A. § 400.

Another point made by Timken is that it may contest the patent on a plea of failure of consideration. There are decisions establishing an exception to the rule on that ground, but it takes more than merely an assertion of invalidity or even the fact of invalidity to show failure of consideration. The typical case in which it has been allowed to toll the estoppel is where general competition by unlicensed manufacturers who have gone ahead in disregard of the patent has made it wholly valueless to the licensee.

Although estopped to contest the validity of the patent, a licensee is not precluded from showing the state of the art, for the purpose of construing the claims. If, in the process, the claims should be held to mean something narrower than might appear from the literal reading of them, the licensee is entitled to the benefit of that, on the question whether or not he must pay royalties. See Westinghouse Electric & Mfg. Co. v. Formica Insulation Co., 266 U.S. 342, 45 S.Ct. 117, 120, 69 L. Ed. 316. This is the rule of the patent law, and it is not affected by reference in this agreement to a patent with claims dominating transfer cases made by Timken. The purpose and meaning of that clause has been pointed out and I think that it has no effect upon the extent of the use which may be made of prior art in this case. That is defined by the general rule in the Formica case.

At this point it may be convenient to dispose of two fact issues, before taking up the question, which of the Timken transfer cases are subject to royalties.

1. I find as a fact that there was no definite agreement on the part of Alma to bring the Spicer use to the attention of the Patent Examiner in the course of further prosecution of the patent. If any suggestion was made, which I rather doubt, it was not with the intention that it should be a definite obligation upon Alma and did not constitute an inducing cause of the agreement. Consequently, Alma's failure to bring the Spicer use to the attention of the Patent Examiner has no...