Yarn Processing Patent Validity Litigation, In re

• Decision Date: 19 April 1976
• Docket Number: No. 74--3703,74--3703
• Parties: In re YARN PROCESSING PATENT VALIDITY LITIGATION. CELANESE CORPORATION and Fiber Industries, Inc., Plaintiffs-Appellees, v. LEESONA CORPORATION et al., Defendants, Lex Tex Ltd., Inc., Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 83

530 F.2d 83

190 U.S.P.Q. 523

In re YARN PROCESSING PATENT VALIDITY LITIGATION.

CELANESE CORPORATION and Fiber Industries, Inc., Plaintiffs-Appellees, v. LEESONA CORPORATION et al., Defendants, Lex Tex Ltd., Inc., Defendant-Appellant.

No. 74--3703.

United States Court of Appeals, Fifth Circuit.

April 19, 1976.

Rehearing Denied Aug. 4, 1976.

See 536 F.2d 1025.

James L. Armstrong, III, Miami, Fla., for defendant-appellant.

Charles A. Kimbrell, Miami, Fla., for plaintiffs-appellees.

Appeal from the United States District Court for the Southern District of Florida.

Before GOLDBERG and AINSWORTH, Circuit Judges, and NICHOLS, ^* Associate Judge.

NICHOLS, Associate Judge:

STATEMENT OF THE CASE

This attorney conflict of interest case arises as part of a complex patent and anti-trust controversy involving 51 lawsuits. The cases have been consolidated for pre-trial proceedings in the Southern District of Florida. In re Yarn Processing Patent Validity Litigation, 341 F.Supp. 376 (Jud.Pan.Mult.Lit.1972). Though the appeal is not from a final judgment in the traditional sense, we take jurisdiction of it as a collateral matter severable from the underlying suit, and too important to be denied review at this time. See, Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949); United States v. Garcia, 517 F.2d 272, 275 (5th Cir. 1975). For the purposes of this case it will be sufficient to identify only the principal parties concerned and their interest in the underlying litigation.

Lex Tex Corporation is the owner of three patents involving the processing of synthetic yarn. These patents cover the 'double heater' false twist process, which is more sophisticated than the 'single heater' false twist process for which three patents are held by Leesona Corporation, a closely allied company to Lex Tex or working in concert with it. All of the 'single heater' patents and all but one of the 'double heater' patents owe their existence to the research efforts of Nicholas J. Stoddard and Warren A. Seem, two inventors who formed Permatwist and sold their inventions to Leesona through that partnership. Leesona has subsequently transferred its interest in the 'double heater' technology to Lex Tex. Lex Tex obtained the other 'double heater' patent (hereinafter referred to as the '011' patent) through a British concern, Ernest Scragg & Sons, Ltd. Lex Tex pays Scragg a portion of the royalties it collects for the use of all the 'double heater' patents. In addition, Scragg is one of several manufacturers of the machines using the false twist processes.

Leesona and Lex Tex license, on a royalty-free basis, the machine manufacturers to manufacture and sell the production machines which implement the false twist process. The manufacturers are required to sell only to licensed throwsters, i.e., manufacturers of synthetic yarn, who pay Leesona or Lex Tex a use royalty computed on the basis of the amount of fabric produced. Machine manufacturers receive or have received a portion of the use royalties which are collected by Lex Tex and Leesona for the use of the machines produced by the particular manufacturer.

Following the abolition of the patent licensee estoppel doctrine by the Supreme Court decision in Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969), throwsters originally brought this litigation against Leesona, Lex Tex and Permatwist. The suits allege patent invalidity, patent misuse and anti-trust violations. In addition to judicial declarations of patent unenforceability, the suits seek treble damages. Leesona and Lex Tex have counter-claimed for patent infringement, and they seek payment of royalties under the license agreements. Leesona also has counter-claimed against Burlington Industries and Celanese Corporation, the dominant thowsters, alleging monopolization of the false twist yarn texturizing industry and conspiracy to restrain entry into that industry.

Edward S. Irons, Esquire, and his law firm, Irons & Sears, now represent Celanese Corporation and its subsidiary, Fiber Industries, Inc. (Hereinafter collectively referred to as Celanese/F. I.I.). The alleged conflict of interest arises because several years ago Scragg retained various law firms with which Mr. Irons was at the time a senior partner, for the purpose of advice regarding the validity of the 'single heater' patents held by Leesona. Scragg later became a party defendant in the instant litigation and made a motion to disqualify Mr. Irons. Celanese/F.I.I. was the only party which had joined Scragg as a defendant. Following argument on the motion, Celanese dismissed its complaint against Scragg without prejudice. Several months thereafter Lex Tex moved to disqualify Irons. After argument, Judge C. Clyde Atkins denied the Lex Tex motion on the grounds that Lex Tex has no standing to raise the question. Lex Tex has appealed this decision, and finding ourselves in substantial agreement with Judge Atkins, we affirm.

THE RELATIONSHIP BETWEEN SCRAGG AND THE IRONS LAW FIRMS

According to the allegations of the Scragg motion to disqualify Irons, the law firm of Burns, Doane, Benedict & Irons began its relationship with Scragg in late 1957. This firm changed its name and membership several times during the relevant periods but Mr. Irons remained connected. We assume, for purposes of this decision, so long as Mr. Irons was a member, his personal role in handling Scragg's business is irrelevant and need not be considered. Therefore, we can and do refer to each firm just as the 'Irons firm'. During 1957 and 1958 the Irons firm advised Scragg on the validity of the 'single heater' patents owned by Leesona, which was then known as Universal Winding. About this time Ernest Philip Rushton Scragg filed the predecessor application in the British patent office covering the 'double heater' false twist technology now covered by the '011' patent issued to Mr. Scragg in the United States. Scragg was concerned that utilization of the 'double heater' technology might infringe the 'single heater' patents owned by Universal Winding. The purpose of the advice related to the advisability of a declaratory judgment action to be brought against Universal Winding on the issue of the validity of the 'single heater' patents and on the issue of whether they were infringed by Scragg. It should be noted that nowhere is it alleged or shown in incorporated motion papers that Irons was personally involved in any way with the matters concerning Scragg. However, it is clear that during the 1957--58 period and subsequent periods, technical information was imparted to Irons' former partners by Scragg and its British patent agent.

Although Scragg filed no suit immediately resulting from the advice of the Irons firm given in 1957--58, it is clear that Scragg maintained an adverse interest in relation to the continued validity of the 'single heater' patents for a considerable period of time. During September 1959, Scragg became a party defendant in a United States District Court infringement suit brought by Universal Winding against Southern Silk Mills, a licensee of Scragg. Scragg had a 'hold harmless' clause in the agreement with Southern Silk. Scragg was eventually dismissed as a party in that case approximately one year later. However, Scragg continued to retain counsel with respect to the litigation. Originally, Scragg retained a law firm with which Mr. Irons was not associated. However, in early 1962, Scragg substituted an Irons law firm. The original firm sent the Irons firm all the relevant files. The Irons firm used the files to aid Southern Silk in the defense of the lawsuit.

Mr. Irons represented to the Court below--and no one disputed--that Scragg settled with Leesona the 'single heater' patent infringement and validity issues under American law in line with the outcome of another suit brought by Scragg in Canada, which resulted in an unreported decision for Leesona/Universal Winding, filed February 28, 1964. See: In re Yarn Processing Patent Validity Litigation, 498 F.2d 271, 275--77 (5th Cir. 1974). Mr. Irons asserted that this firm had nothing to do with this settlement, and there is no assertion of any further attorney-client relationship with Scragg. By November 1965, Scragg accepted a Leesona license under the United States and Canadian 'single heater' patents. On June 16, 1971, Scragg assigned the '011' double heater patent to Lex Tex Under which Scragg obtains a share of the total royalty income from all the 'double heater' patents.

On June 28, 1971, Mr. Irons filed a complaint in the United States District Court for the Southern District of Florida on behalf of Celanese/F.I.I. seeking a declaratory judgment invalidating the Leesona 'single heater' patents and the Lex Tex 'double heater' patents (including the '011' patent acquired from Scragg). On September 28, 1972, Mr. Irons filed a complaint in the same court seeking the same relief against Scragg with regard to the '011' patent. According to affidavits filed by Mr. Irons and his partner below, this complaint was filed shortly after Mr. Irons and his partner had attempted to obtain Scragg's voluntary cooperation in furnishing material from its files.

On January 29, 1973, Scragg filed its 'Motion to Disqualify Edward S. Irons and the Firm of Irons, Sears & Santorelli, or in the Alternative, to Dismiss Ernest Scragg and Sons, Limited and Scragg of North America, Inc.' Shortly after the hearing on the motion but prior to any ruling by the District Court, Celanese/F.I.I. dismissed its suit against Scragg without prejudice on April 10, 1973, under Rule 41(a)(1) of the Federal Rules of Civil Procedure. Scragg did not press the disqualification matter any further.

Lex Tex filed its motion to disqualify Irons and his firm on September 13, 1973. In this motion, Lex Tex did not assert any interest of its own as to which it could assert a conflict of interest....