Transitron Electronic Corp. v. Hughes Aircraft Co.

• Decision Date: 15 April 1981
• Docket Number: Nos. 80-1234,80-1235,s. 80-1234
• Citation: 649 F.2d 871
• Parties: TRANSITRON ELECTRONIC CORPORATION, Plaintiff, Appellant, v. HUGHES AIRCRAFT COMPANY, Defendant, Appellee. TRANSITRON ELECTRONIC CORPORATION, Plaintiff, Appellee, v. HUGHES AIRCRAFT COMPANY, Defendant, Appellant.
• Court: U.S. Court of Appeals — First Circuit

Page 871

649 F.2d 871

210 U.S.P.Q. 161

TRANSITRON ELECTRONIC CORPORATION, Plaintiff, Appellant, v. HUGHES AIRCRAFT COMPANY, Defendant, Appellee.

TRANSITRON ELECTRONIC CORPORATION, Plaintiff, Appellee, v. HUGHES AIRCRAFT COMPANY, Defendant, Appellant.

Nos. 80-1234, 80-1235.

United States Court of Appeals First Circuit.

Argued Sept. 10, 1980.

Decided April 15, 1981.

David Wolf, with whom Louis Orenbuch, Milton Oliver, Boston, Mass., and Wolf, Greenfield & Sacks, P. C., Boston, Mass., were on brief, for Transitron Electronic Corp.

John R. Hally, Boston, Mass., with whom Mary Lee Jacobs, and Nutter, McClennen & Fish, Boston, Mass., were on brief, for Hughes Aircraft Co.

Before CAMPBELL and BOWNES, Circuit Judges, and NELSON, ^* District Judge.

LEVIN H. CAMPBELL, Circuit Judge.

This case requires us to explore the kind of showing a patent licensee needs to make in order to recover royalties already paid under a license agreement when the patent itself is subsequently declared invalid. The main appeal is brought by Transitron Electronic Corporation from a judgment rendered by the district court in favor of Hughes Aircraft Company, the defendant in Transitron's action for restitution and damages arising out of a patent licensing agreement.

I. Background

On March 31, 1950, Hughes filed a patent application for a "glass-sealed semi-conductor crystal device," which had been invented by Harper Q. North and Justice N. Carman, Jr. The invention is described in this court's opinion in General Instrument Corp. v. Hughes Aircraft Co., 399 F.2d 373, 374 (1st Cir. 1968), as well as in the opinion of the district court, 487 F.Supp. 885, 889 (D.Mass.1980). The patent, No. 2,694,168, was issued on November 9, 1954. On different occasions in the period 1950 through 1954, Hughes amended its application by adding claims purporting to describe in greater detail the invention itself and the process of producing it. The present case involves two of these amendments, filed on July 27, 1954 as claims 102 and 103, which the patent office allowed on September 2, 1954 as claims 60 and 61.

On March 20, 1951, a year after it had first filed for the United States patent, Hughes applied for a British patent on the same invention. The British patent was issued on November 24, 1954, as No. 721,201. The same material embodied in claims 60 and 61 of the United States patent, together with a three-page preamble, was filed in Great Britain, on November 8, 1954, not as a claim under the parent patent, but as a separate improvement in an application for a British Patent of Addition.

Beginning in 1954, Hughes investigated possible infringement of its patent rights by several manufacturers, including Transitron. Notices were sent out charging infringement and offering non-exclusive licenses. On June 1, 1962, Hughes and Transitron executed a five-year license agreement, giving Transitron the right to manufacture diodes covered by claims 60 and 61 of Hughes' patent in exchange for a one percent royalty and for licenses under certain patents held by Transitron. Transitron manufactured under this license until October 1, 1962, at which time it notified Hughes that it had switched to a manufacturing process outside the Hughes patent. In 1966, Hughes discovered that Transitron was once again manufacturing diodes covered by the license. After Hughes demanded back royalties, the parties agreed to a lump sum settlement and renewal of the license agreement. Transitron operated under the license for several months and then again announced that it had switched to another method.

In 1967, Hughes sued General Instrument Corporation for infringement of claims 60 and 61. Hughes Aircraft Co. v. General Instrument Corp., 275 F.Supp. 961 (D.R.I.1967). General Instrument responded by challenging the validity of these claims. Hughes prevailed in the district court; on appeal, however, this court reversed, holding that claim 60 was new matter, not supported by the original patent application, in violation of 35 U.S.C. § 132. ¹ General Instrument Corp. v. Hughes Aircraft Co., 399 F.2d 373 (1st Cir. 1968). ² Noting that commercial sales of the diode embodying the new matter had commenced over a year prior to filing, we declared claim 60 to be invalid, 399 F.2d at 377, 380. In reaching that conclusion, this court emphasized the preamble that was filed as part of Hughes' application for the British Patent of Addition, but that had not been provided to the United States patent office. ³ Id., at 376.

Transitron brought this action in 1970. Count I was in antitrust, resting on the theory that Hughes had used the patent (in particular claims 60 and 61), which it was said to have procured through fraud on the patent office and in violation of the Invention Secrecy Act, 35 U.S.C. §§ 181-188, to coerce Transitron and others to enter into licensing agreements. Treble damages were sought. Count II, relying on much the same factual allegations, sought the return of all royalties for patent misuse. Count III likewise sought the return of royalties, but on the theory that Hughes' false and misleading representations to the patent office as reflected in the file wrapper were material misrepresentations which induced Transitron to take a license. Alternatively, return of royalties was sought on the theory that the parties' belief that claims 60 and 61 were valid constituted a mutual mistake of fact.

Hughes counterclaimed for certain back royalties, asserting that the 1966 settlement was invalid because Transitron had misrepresented to Hughes the extent of its use of Hughes' patent between 1962 and 1966.

After an eight-day trial, the district court granted judgment for Hughes on all of Transitron's claims and for Transitron on Hughes' counterclaim. Both parties have appealed, although Hughes indicates that it chooses not to press its cross-appeal should we now hold against Transitron on Transitron's claim. We affirm the judgment of the district court in both cases.

On appeal, Transitron presses exclusively its tort and contract theories for recovery of back royalties. ⁴ These have been somewhat amplified from their presentation in the district court, and appear to be, in essence, as follows: (1) In causing Transitron to accept a license and pay royalties, Hughes benefited from conduct that was, at least, negligently deceptive and, at worst, deliberately fraudulent, and that, in either event, such conduct amounted to a tort entitling Transitron to the return of its royalties and to consequential damages; (2) Whether or not Hughes' conduct amounted to fraud or another tort, Transitron is entitled to rescind the licensing agreement and have its royalties returned as the agreement was invalid for lack of consideration. Under each of its theories Transitron asserts a right to recover all royalties paid to Hughes under the license. Since the claim of failure of consideration is just another way of saying that the patent is invalid, we do not treat this theory separately. We begin by considering the law on recovery of royalties by a patent licensee.

II. The Legal Standard for Restitution of Royalties

In Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969), the Supreme Court held that a patent licensee would no longer be estopped from challenging the validity of the patent under which he was licensed and, if successful, from rescinding the licensing agreement. Circuit courts since Lear are agreed, however, that while such an adjudication of the patent's invalidity will permit rescission of the agreement, it will not, without more, allow the licensee to recover royalties paid prior to bringing suit. St. Regis Paper Co. v. Royal Industries, 552 F.2d 309, 313 (9th Cir.), cert. denied 434 U.S. 996, 98 S.Ct. 633, 54 L.Ed.2d 490 (1977); Zenith Laboratories v. Carter-Wallace, 530 F.2d 508 (3d Cir.), cert. denied, 429 U.S. 828, 97 S.Ct. 85, 50 L.Ed.2d 91 (1976); Troxel Manufacturing Co. v. Schwinn Bicycle Co., 465 F.2d 1253 (6th Cir. 1972). See also Nashua Corp. v. RCA Corp., 431 F.2d 220 (1st Cir. 1970); Drackett Chemical Co. v. Chamberlain Co., 63 F.2d 853, 854-55 (6th Cir. 1933). In Troxel the Sixth Circuit discussed the reasons for this rule, emphasizing the equities between licensor and licensee, and the policies favoring early adjudication of patent validity and encouragement of the use of the patent system by protecting the security of royalty income. The Troxel court pointed out how undesirable it would be if a patentee took all royalty payments subject to the danger of having to disgorge them at an uncertain future date to a licensee who, during the period in which the royalties were paid, had himself enjoyed the protection of the patent and immunity from suit under it. Were the law thus, the value of patents might be so diminished as to discourage inventors from procuring them, with the result that inventions would be kept secret rather than publicly disclosed as the patent system requires. We fully agree with the reasoning in Troxel and accept as a general rule that a licensee may not recover royalties he has already paid for use of a patent which is subsequently declared invalid.

Troxel and the above cases mention one exception to this rule. The exception occurs when a patent holder has induced the licensee to enter into the license agreement through fraud; in such event, the licensee is entitled to restitution of his royalty payments. While we have found only one case in which this exception was actually applied, Ampex v. Memorex Corp., 205 U.S.P.Q. 794 (N.D.Cal.1980), ⁵ such an exception plainly exists. In addition to cases cited in the previous paragraph, see, e. g., In re Multidistrict Litigation Involving Frost Patent, 398 F.Supp. 1353 (D.Del.1975), aff'd in part, rev'd in part, 540 F.2d 601 (3d Cir. 1976); SCM Corp. v. RCA, 318 F.Supp. 433, 470-72 (S.D.N.Y.1970). The fraud exception does no violence to the policies described in Troxel. It does...