Zenith Laboratories, Inc. v. Carter-Wallace, Inc.

• Decision Date: 10 February 1976
• Docket Number: CARTER-WALLAC,INC,No. 75--1570,75--1570
• Citation: 530 F.2d 508
• Parties: ZENITH LABORATORIES, INC., on behalf of itself and all others similarly situated, Appellant, v.
• Court: U.S. Court of Appeals — Third Circuit

Page 508

530 F.2d 508

189 U.S.P.Q. 387

ZENITH LABORATORIES, INC., on behalf of itself and all others similarly situated, Appellant, v. CARTER-WALLACE, INC.

No. 75--1570.

United States Court of Appeals Third Circuit.

Argued Nov. 18, 1975.

Decided Feb. 10, 1976.

David R. Simon, Simon & Allen, Newark, N.J., for appellant.

Andrian M. Foley, Jr., McElroy, Connell, Foley & Geiser, Newark, N.J., Breed, Abbott & Morgan, New York City, for appellee.

Before VAN DUSEN, ADAMS and ROSENN, Circuit Judges.

OPINION OF THE COURT

ROSENN, Circuit Judge.

The question raised by this appeal, whether a licensee or purchaser from a patentee may recover excess payments attributable to a patent subsequently declared invalid, is one of first impression in this court. ¹ Zenith Laboratories, Inc. (Zenith), a bulk purchaser of a patented drug, sued the patentee, Carter-Wallace, Inc. (Carter), in the United States District Court for the District of New Jersey ² for recovery of $130 million in excess payments allegedly made by a class of licensees and purchasers from Carter. Zenith appeals from a grant of summary judgment in favor of Carter. We affirm the judgment of the district court.

I.

Carter was granted a patent on the drug meprobamate in 1955 and immediately entered into license agreements with three companies. ³ One of these agreements became the subject of an antitrust suit by the Government in United States v. Carter Products, Inc., 211 F.Supp. 144 (S.D.N.Y.1962). Pursuant to the consent decree entered in that case, Carter began selling bulk meprobamate on non-discriminatory terms under a price ceiling to 'qualified pharmaceutical houses' as specifically defined by it in its 'confirmation of sale.' Zenith and ninety-two other pharmaceutical houses purchased meprobamate under terms set forth in the confirmation of sale.

Zenith, however, claims that Carter's prices for meprobamate were so exorbitant compared to prices prevailing on the world market that Zenith soon began to buy bulk meprobamate abroad. In response, Carter filed a patent infringement suit against Zenith, which Zenith defended by asserting inter alia that Carter's patent was invalid, that Carter had consented to Zenith's manufacture, use, and sale of meprobamate, and that Carter was in violation of federal antitrust laws by misuse of its patent. Zenith also set forth a three-count counterclaim based on Carter's alleged violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2 (1971) as follows: (1) price-fixing and monopoly of the manufacture, distribution, and sale of meprobamate beyond the scope of the patent; (2) a combination and conspiracy with Lederle to restrain trade and to tie an unpatented product to a patented one; and (3) a combination and conspiracy with Merck to restrain trade and to pool patents.

While the infringement suit against Zenith was pending, Carter's meprobamate patent was held invalid on the basis of obviousness in an unrelated case, Carter-Wallace, Inc. v. Davis Edwards Pharmacal Corp., 341 F.Supp. 1303 (E.D.N.Y.1972), aff'd sub nom. Carter-Wallace, Inc. v. Otte, 474 F.2d 529 (2d Cir. 1973). Carter's claim in this action was therefore dismissed, leaving only Zenith's counterclaim still before the court. Counts I and III of the counterclaim were voluntarily abandoned by Zenith, and an order of dismissal with prejudice was entered, specifying that 'this Order does not operate as a determination of this matter on the merits.' Zenith also agreed to settle Count II and released its claims thereunder. ⁴

Before settlement of Count II, Zenith initiated the present suit in the United States District Court for the District of New Jersey against Carter on behalf of purchasers of meprobamate to recover 'all royalties (i.e., amounts attributable to the existence of the patent)' paid to Carter since the patent issued in 1955. Judge Whipple certified the class pursuant to Fed.R.Civ.P. 23(c)(1).

Zenith's original complaint contained one count and was based upon Troxel Manufacturing Co. v. Schwinn Bicycle Co., 334 F.Supp. 1269 (D.Tenn.1971). ⁵ It alleged the right to recover excess payments without elaborating the theory on which it grounded its action. ⁶ The district court in Troxel had awarded to a licensee royalties paid under an invalid patent purportedly applying the federal patent policy articulated in Lear v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969).

After the Court of Appeals for the Sixth Circuit reversed the district court decision in Troxel, Zenith amended its complaint in order not to rely exclusively upon the overruled holding. It added three counts which listed equitable theories of recovery. ⁷ In addition, Zenith set forth an entirely new cause of action for fraud on the Patent Office, apparently seeking to fit within the exception for recovery of payments made under a fraudulently obtained patent recognized by the appellate court in Troxel. ⁸ 465 F.2d 1259 n.5.

Judge Stern, who had replaced Judge Whipple by normal rotation, reconsidered the prior class certification after Zenith had amended its complaint. He determined that the asserted class was an improper mix of licensees and mere purchasers and concluded that Zenith was not an appropriate class representative of either group. Zenith Laboratories, Inc. v. Carter-Wallace, Inc., 64 F.R.D. 159 (D.N.J.1974). Zenith was ordered to amend its pleading to eliminate class allegations, and the case continued as a private action.

Thereafter, the court entered summary judgment in favor of Carter because it could find no theory upon which Zenith was entitled to recover its excess payments to Carter. Zenith appeals from both the judgment against it and the denial of class status.

II.

Zenith's contention that Judge Whipple's certification of the class constituted the 'rule of the case' and should not have been overturned is answered by Fed.R.Civ.P. 23(c)(1), which provides: 'An order under this subdivision may be conditional, and may be altered or amended before the decision on the merits.' This court, in Interpace Corp. v. Philadelphia, 438 F.2d 401 (3d Cir. 1971), declared that a district court is obliged to take cognizance of a changed factual situation and may alter an earlier order accordingly. Moreover, the Committee Notes on Rule 23 envision modification of a class certification 'if, upon fuller development of the facts, the original determination appears unsound.'

Zenith insists that no new facts had been developed to justify a redetermination under Rule 23(c)(1). We disagree. It is undisputed that the prior action, which was pending when the first class determination was made, had been settled at the time of the second determination. In addition, Zenith had added four counts to its complaint, at least one of which was not even anticipated in its first complaint. Judge Stern also believed that Judge Whipple's class certification might have been based upon the erroneous assumption that Zenith was an express licensee of Carter. These considerations warranted the reevaluation of the original class certification.

We affirm the district court's denial of Zenith's motion for class certification because the district court did not err in holding that Zenith is an improper class representative. If Zenith were allowed to represent the alleged class, Carter could assert defenses against it which would not be applicable to the class as a whole, such as res judicata based on the disposition of Zenith's counterclaims in the earlier suit. Since these unique defenses could conceivably become the focus of the entire litigation and divert much of Zenith's attention from the suit as a whole, the remaining members of the class could be severely disadvantaged by Zenith's representation. Koos v. First National Bank, 496 F.2d 1162, 1164--65 (7th Cir. 1974).

III.

In our discussion of the entry of summary judgment against Zenith, we must first treat Zenith's claim that it is a licensee. The district court concluded that Zenith was a mere bulk purchaser, rather than a licensee, and based its decision on that characterization of Zenith's status. We believe that Zenith would not be entitled to recover royalties even if it were a licensee; as a mere purchaser, its claim would be even weaker. Thus, we need not decide whether Zenith is an implied or express licensee or whether it is an outright purchaser, ⁹ for Zenith cannot succeed under either construction of its relationship with Carter.

Let us assume, arguendo, that Zenith is indeed a licensee in order to demonstrate that even the strongest case for Zenith cannot result in a recovery. First, since Count I derives from the district court's decision in Troxel, which was reversed on appeal, it must fall if we adopt the appellate court's contrary position. Suits such as this one have recently been disposed of on the authority of the appellate decision in Troxel, 465 F.2d 1253. Kraly v. National Distillers and Chemical Corp., 502 F.2d 1366 (7th Cir. 1974); Ransburg Electro-Coating Corp. v. Spiller & Spiller, Inc., 489 F.2d 974 (7th Cir. 1973).

The reasoning of the Troxel appellate court is persuasive. Federal patent policy in favor of early adjudications of invalidity, it argued, would be defeated by allowing recovery of past royalties:

(S)uch an interpretation of Lear would make it advantageous for a licensee to postpone litigation, enjoy the fruits of his licensing agreement, and sue for repayment of royalties near the end of the term of the patent.

465 F.2d at 1257. Furthermore, the prospect of refunding all royalties collected would constitute such a cloud over a licensed patent that patenting would be discouraged. Thus, Troxel adhered to the earlier ruling of the Sixth Circuit in Drackett Chemical Co. v. Chamberlain Co., 63 F.2d 853 (6th Cir. 1933), that the obligation to pay royalties ends upon 'eviction' ¹⁰ from the license by an adjudication in a court of competent jurisdiction of invalidity of the underlying...