Western Geophysical Co. of America, Inc. v. Bolt Associates, Inc.

• Decision Date: 01 September 1978
• Docket Number: No. 569,D,569
• Citation: 584 F.2d 1164
• Parties: WESTERN GEOPHYSICAL COMPANY OF AMERICA, INC., Plaintiff-Appellee, v. BOLT ASSOCIATES, INC., Defendant-Appellant. BOLT ASSOCIATES, INC., Third-Party Plaintiff-Appellant, v. LITTON INDUSTRIES, INC., Third-Party Defendant-Appellee. ocket 77-7362.
• Court: U.S. Court of Appeals — Second Circuit

Page 1164

584 F.2d 1164

200 U.S.P.Q. 1

WESTERN GEOPHYSICAL COMPANY OF AMERICA, INC., Plaintiff-Appellee, v. BOLT ASSOCIATES, INC., Defendant-Appellant.

BOLT ASSOCIATES, INC., Third-Party Plaintiff-Appellant, v. LITTON INDUSTRIES, INC., Third-Party Defendant-Appellee.

No. 569, Docket 77-7362.

United States Court of Appeals Second Circuit.

Argued May 10, 1978.

Decided Sept. 1, 1978.

Roland T. Bryan, Stamford, Conn. (Joel E. Lutzker, Thomas N. Twomey, Bryan & Bollo, P.C., Stamford, Conn., of counsel), for appellant.

William J. Doyle, New Haven, Conn. (Shaun S. Sullivan, Wiggin & Dana, New Haven, Conn., of counsel), for plaintiff-appellee and third-party defendant-appellee.

Before HAYS, MANSFIELD and INGRAHAM, ^* Circuit Judges.

HAYS, Circuit Judge:

Defendant-Appellant, Bolt Associates, Inc. ("Bolt"), appeals from a judgment entered in the United States District Court for the District of Connecticut, Blumenfeld, Judge, awarding Plaintiff-Appellee, Western Geophysical Company of America, Inc. ("Western"), damages of $848,544 for Bolt's wrongful termination of an exclusive licensing agreement. Bolt contends that Judge Blumenfeld erred: (1) in ruling that Bolt's termination of Western's exclusive license was not justified by Western's failure to use, or to sublicense others to use, the patented invention that was the subject of the exclusive license; (2) in entering judgment in an amount based on Bolt's actual royalty income rather than on Western's potential earnings had the agreement not been terminated; and (3) in dismissing Bolt's antitrust counterclaims against Third-Party Defendant-Appellee, Litton Industries, Inc. ("Litton"), Western's parent company.

We reject Bolt's arguments in support of these claims, and affirm the judgment of the District Court.

I

In 1961, Bolt ¹ filed a patent application on the Pneumatic Acoustical Repeater ("PAR"), an air gun device designed to provide a source of sound for use in underwater seismic exploration. The PAR works in the following manner: Highly compressed air is suddenly released from the PAR into the water, producing sound energy. This sound passes through sediments and is reflected from the ocean bottom. With proper additional equipment for reception and analysis, the bottom structure can be determined from the reflected signals.

Seismic exploration is of two basic types: (1) shallow reconnaissance surveys or oceanographic mapping providing data needed to map the ocean bottom and to determine its suitability for dredging or structural support, and (2) deep penetration, fine detail exploration providing data needed to ascertain the nature and formulation of subbottom strata. This latter type of exploration is primarily commissioned by oil companies; the information obtained may indicate the presence of oil or other minerals in these strata. Before the invention of the PAR (and other nonexplosive sound-creating devices), the primary source of sound for exploration purposes was dynamite or other explosives.

It is undisputed that, in the early 1960's, Bolt was not equipped to exploit the PAR. ² In April, 1963, Bolt gave Western an exclusive license to use and to sublicense PAR's with chamber volumes of greater than 10 cubic inches and less than 200 cubic inches. ³ Bolt and Western were to share equally in any royalty income. The agreement required Western

to use its best efforts to promote world-wide licensing and use of the licensed apparatus to government and non-profit institutions during the first two years of this Agreement and hereafter, or at such earlier time as Western may elect, to all other possible sublicensees of such apparatus.

An earlier agreement gave Western the right to a similar license with respect to any improvements or design developments in the 10 to 200 cubic inch range, to inventions relating to PAR's in excess of 200 cubic inches, and to fueled PAR's, if Bolt later developed them. Western gave Bolt $25,000, one-half of which was to be applied in the development of such devices and improvements.

For reasons that will be examined below, Western did not use the PAR or sublicense its use. In May, 1966, Bolt sent Western a Notice of Termination which purported to terminate Western's exclusive license as of June 30, 1966. The primary ground asserted for this termination was Western's alleged failure to "use its best efforts to promote world-wide licensing and use" of the PAR. A short time later, Bolt refused to permit Western to exercise its options for exclusive licenses with respect to fueled PAR's and PAR's in the over 200 cubic inch range. Immediately following the purported termination of Western's exclusive license, Bolt successfully exploited the PAR; Bolt sold, leased and licensed PARs in the 10 to 200 cubic inch range.

In March, 1967, Western brought suit against Bolt, claiming breaches of both contracts. As noted by the District Court, the resolution of these questions depends primarily on whether Western's conduct during the licensing period justified Bolt's termination of the agreement. Thus, it is necessary to examine the events of this period in some detail.

While the propriety of and motivation for Western's actions are questioned by Bolt, the basic facts are undisputed. During the period from April, 1963, to June 30, 1966, Western neither used nor licensed others to use the PAR in underwater seismic exploration. Initially Western found that the 135 cubic inch PAR gun, which it leased from Bolt for the purpose of determining whether to enter into the exclusive licensing agreement, was not mechanically sound. The device broke down "repeatedly" during testing thereby indicating its inadequacy for seismic exploration, which requires frequent firing over an extended period of time. After obtaining Bolt's permission to manufacture the PAR itself, however, Western entered into the April, 1963, agreement. Western allegedly took this action because it concluded from its tests that the PAR could be competitive with existing non-explosive sound sources if made mechanically reliable. Western hoped to achieve such reliability by redesigning the PAR guns.

In November, 1964, Western successfully tested its redesigned PAR and concluded that the device was mechanically adequate. These tests, however, indicated a "noise" problem, denominated a "bubble pulse" effect, which had not been evident from the initial testing: when the air bubble released from the PAR expanded a certain amount, the water pressure outside the bubble became greater than the air pressure inside the bubble and the bubble collapsed, creating an unwanted sound; this sequence could be repeated several times after a single discharge of the PAR gun. These sounds, as well as other "noise" such as sounds caused by the movement of the ship through the water, interfered with the reception of the desired signals, the reflected air gun sounds. In fact, Western found that the "noise" was so great that it made the PAR gun useless for deep penetration seismic exploration; the reflected signals were too weak to be readily distinguishable from the noise.

Western recognized that, even with the "bubble pulse" problem, the PAR gun was probably useful for shallow reconnaissance surveys or oceanographic mapping. However, Western did not attempt to sublicense the PAR to others for that purpose. Western claimed, and the District Court found, that, by the time the PAR was adequately redesigned, the market for such exploration was leveling off and was about to decline. Western concluded that the PAR could not successfully compete with established sound sources for this diminishing market.

Western apparently decided that the only way to successfully exploit the PAR would be to improve the PAR and/or the equipment used to receive its signal and/or the equipment used to analyse the data received. Thus, as the District Court found, Western expended substantial amounts of time and money, ⁴ between November, 1964, and the date of the purported termination of its exclusive license, in various attempts to develop a system in which the PAR could be employed in deep penetration seismic exploration. ⁵ However, Western was not successful during this period. One important piece of peripheral signal-receiving equipment, the long Paslay streamer cable, ⁶ did not become generally available to the industry until March, 1966. Another device, useful in separating "noise" from desired signals by digital analysis, became available at an even later date.

During this period in which Western sought to develop a complete, useful system for deep penetration seismic exploration, Western did not attempt to sublicense the PAR to other companies engaged in the same work. The reasons for this decision were recounted by the District Court in its Memorandum and Order on the question of liability: ⁷

The customers of companies who, like Western, conduct marine seismic explorations are large and successful oil companies who put accent on the objective certainty of the information they are paying to obtain. They pay out their money to an exploration company at the rate of about $100,000 a month for a seismic survey in the expectation of receiving one that is finely detailed and accurate. The cost of drilling a well may run as high as a million dollars. In most cases, the oil companies specify the sound source to be used by the exploration company. If surveys made with the use of PAR did not measure up to what they were paying for, they would be quick to move elsewhere and slow to return.

Thus, Western claimed, there was no market during this period for the PAR gun alone; only a complete system would be commercially successful.

It is undisputed that, during the period of the exclusive license, Western kept Bolt informed of its efforts to improve the mechanical reliability of the PAR and its subsequent efforts to eliminate the "bubble pulse" effect and/or to develop a system wherein the PAR could be usefully employed....