The opinion of the court was delivered by: STEPHENS
[EDITOR'S NOTE: THE ORIGINAL SOURCE CONTAINED ILLEGIBLE WORDS AND/OR MISSING TEXT.]
This is an action in equity instituted by the United States, hereinafter referred to as the Government, to restrain the defendants from alleged violations of Sections 1, 2 and 3 of the Sherman Act. Injunctive relief is sought under Section 4.1a The corporate defendants are: United States Gypsum Company (hereinafter referred to as USG), National Gypsum Company (national), Certain-teed Products Corporation (Certain-teed), The Celotex Corporation (Celotex), Ebsary Gypsum Company, Inc. (Ebsary), and Newark Plaster Company (Newark). The individual defendants are Samuel M. Gloyd, doing business under the name of Texas Cement Plaster Company (Texas), Sewell L. Avery, Oliver M. Knode, Melvin H. Baker, Bror G. Dahlberg, Henry J. Hartley, Frederick G. Ebsary, and Frederick Tomkins. Avery was president of USG from 1905 to 1936, and since then has been chairman of the Board of Directors. Knode is president of USG. Baker is president of National. Dahlberg is president of Celotex and chairman of the Board of Directors of Certain-teed. Ebsary is president of Ebsary. Tomkins is president of Newark
The defendants are engaged in the mining of gypsum rock and in the manufacture and in the sale in interstate commerce, in the 'Eastern area' of the United States, of gypsum board, gypsum plaster, and miscellaneous gypsum products defined in a bill of particulars as Gypsum Block, gypsum tile, and Keene's cement. The 'Eastern area' includes all of the states of the United States from the East Coast westward to and including New Mexico, Colorado, Wyoming, and the eastern half of Montana.
In the early periods of its manufacture gypsum board was crudely made by pouring buckets of calcined gypsum mixed with water in thin layers between multiple pieces of rough felt paper, smoothing the product with rollers, hardening it on racks and trimming the pieces to size. This was a hand operation. In 1912 the defendant USG commenced the development of more efficient methods of manufacture of gypsum products. An important advance was in the making, by virtue of patent No. 1,034,746, issued in 1912 to USG on application of an inventor-employee named Clarence W. Utzman, of 'closed-edge board.'
Prior to 1912 gypsum board had been made with exposed edges. This required trimming, and there was also breakage in shipping and use, with consequent wastage. The making of closed-edge board solved this problem. Various other improvements were developed, including a board making machine, the use of foam as a substitute for sawdust as an 'aggregate' in the gypsum core to lighten the board, and the use of starch to improve the bond between paper and core. Metallized board, gypsum board covered with metallic foil, was devised for purposes of insulation; and a gypsum lath perforated in such manner as to increase the fire resisting qualities of wall structure was devised. These improvements were covered by patents -- product, process, and machine -- many of which were issued to USG; others were acquired by that company. A demand arose in the trade for these improved products, and companies other than USG commenced to copy them. There ensued many years of litigation in which USG strove to enforce, and eventually succeeded in enforcing, its patent rights.
Prior to 1917 the Bestwall Manufacturing Company (Bestwall) commenced the manufacture of closed-edge board. USG sued for infringement and won. Bestwall Mfg. Co. v. United States Gypsum Co., 7 Cir., 1921, 270 F. 542. Bestwall had however, in the course of the litigation, been acquired by the Beaver Products Company, Inc. (Beaver), and USG by a supplemental bill sued both of these companies for infringement and again prevailed. United State Gypsum Co. v. Bestwall Mfg. Co., D.C.N.D. Ill. 925, 15 F.2d 704. These decisions made the manufacture of closed-edge board by a competitor of USG impossible without infringement of USG's patent rights. This is admitted by the Government. Prior to the last mentioned decision, Augustus S. Blagden, president of Beaver, made overtures of settlement to Sewell L. Avery, president of USG; he continued these efforts after the decree under the supplemental bill. Avery, at a meeting in December, 1925, specified as terms of settlement the payment of damages by Beaver for infringement of USG's patents, acknowledgment by Beaver of the validity of USG's patents, payment of royalties, and the right in USG to fix prices of gypsum board made and sold by Beaver under the Utzman closed-edge patent. A settlement agreement was executed on July 29, 1926, Beaver paying $ 250,000 cash damages and USG granting Beaver a license to make, use and sell the patented products, to use the patented processes and to make and use the patented machines. The terms of the license contract are stated in greater detail below.
In September, 1925, after the decision against Beaver, USG sued The American Gypsum Company (American) and the Universal Gypsum and Lime Company Universal for infringement, and served a notice of infringement upon the Niagara Gypsum Company (Niagara). On September 17, 1926, a settlement and license agreement was entered into with Universal similar to that with Beaver, except that the lump sum payment was approximately $ 35,000. A license agreement was entered into between USG and the Atlantic Gypsum Products Company (Atlantic) on March 5, 1927. In this instance no damages were paid. Texas signed a license agreement on April 11, 1927. This contract was not by way of settlement of an existing claim of infringement, although it recited that Texas had equipped its plant to make closed-edge board and that USG was threatening to sue if such board were produced.
These four license contracts are for convenience referred to in the record as the '1926-1927 contracts.' The licenses granted were under two Utzman patents No. 1,034,746 (the product patent) and No. 1,029,328 (a process patent), and under a third Utzman patent No. 1,330,413 (a machine patent), expiring February 10, 1937, under a Birdsey patent No. 1,358,508 a product patent for partially closed-edge board), and under some sixty or more other patents and applications for patents. The material provisions of the contracts were these: USG granted an indivisible and non-exclusive license until the expiration of the Utzman machine patent on February 10, 1937. It reserved the right to fix during the life of the Utzman product patent, expiring August 6, 1929, the minimum prices at which the licensees might sell board embodying the disclosure of that patent, but at not more than the prevailing market price. The licensees agreed to pay specified royalties on all gypsum board manufactured by them, whether patented or unpatented, until February 10, 1937, the date of the expiration of the machine patent; they acknowledged and agreed not to contest the validity of the patents under which the licenses were granted; they agreed that all of the patented products sold by them and known in the trade as 'seconds' should be invoiced and marked as 'seconds.' USG agreed that the licensees might sell patented gypsum board to manufacturers of plaster and gypsum products who did not themselves make board (referred to in the record as 'manufacturing distributors'), the royalties payable to remain based upon the regular selling price of the licensees to the regular selling price of the licensees to the regular dealer trade. The licensees agreed to keep separate records showing the quantity of all board sold by them, and periodically to render reports to USG showing the quantities and prices of their sales. USG reserved the right to inspect and to make copies of the licensees's memoranda from such records.
In May, 1929, following further litigation, four more license contracts were entered into between USG on the one part and Certain-teed, National, Ebsary, and Niagara, on the other part. In 1923 Certain-teed, originally a manufacturer of roofing products, entered the gypsum industry with the acquisition of the Acme Cement Plaster Company (Acme). In 1926 it commenced the manufacture of open-edge gypsum board at the former Acme plant in Texas. On January 20, 1928, it purchased the assets of Beaver. Beaver was then making a closed-edge board. Certain-teed refused to assume the Beaver -- USG settlement agreement and license. USG thereupon, on or about February 21, 1928, instituted suit in the District Court of the United States in Illinois against Certain-teed and Beaver, seeking an injunction against the distribution of the proceeds of sale to the Beaver stockholders and asserting that Certain-teed should be required to assume all liabilities of Beaver under its settlement agreement and license. Certain-teed was required to put up a million dollar bond, or otherwise to suffer a temporary injunction, as security for damages which might be found due to USG. On May 22, 1929, Certain-teed settled this suit with USG, agreeing to pay damages of approximately $ 64,000 and to fulfill the obligations of Beaver under its original settlement agreement and license; USG executed in Certain-teed's favor a patent license agreement and the suit was dismissed and the bond released. A supplemental license agreement between USG and Certain-teed covering a bundling process patent, more particularly referred to below, was executed on July 3, 1929. On May 16, 1929, National settled two patent infringement suits which USG had brought against it, one on November 5, 1926, the other on May 7, 1928, paying on account of damages approximately $ 178,000 and entering into a patent license agreement with USG. National had commenced the manufacture of a modified closed-edge gypsum board in 1926. Ebsary, which had commenced making open-edge gypsum board in 1928, was granted a patent license by USG on May 22, 1929. This license was not a part of settlement of an infringement claim, since Ebsary had not manufactured closed-edge board and there was no infringement suit or basis therefor against it.
Niagara commenced making an open-edge gypsum board, but later made board with a semi-protected edge covered by a Clark application for a patent owned by American. This board had been developed by American in an attempt to compete with USG's closed-edge board. USG claimed that this board infringed its Birdsey patent No. 1,358,508 covering the manufacture of board with a partially closed edge. Priority over the Clark application had been awarded Birdsey by the Commissioner of -- patents; this was affirmed by the Court of Appeals of the District of Columbia in 1926. Clark v. Birdsey, 56 App.D.C. 136, 10 F.2d 1001. A contract of settlement was entered into between Niagara and USG. This contract is not in evidence but is referred to in a later license agreement between Niagara and USG dated October 8, 1929, in which it appears that the earlier contract provided for money damages to USG in the sum of approximately $ 28,000 and a patent license to Niagara. These four license contracts between USG on the one part and Certain-teed, National Ebsary and Niagara on the other part, are called the 'May 1929 contracts' in the record. The provisions of these four contracts were in substance the same as those of the 1926-1927 license agreements except that in the May 1929 contracts USG'S right to fix minimum prices was not limited as in the previous agreements, and sales to manufacturing distributors and jobbers were permitted only on USG'S written consent. These contracts involved the same patents as the 1926-1927 agreements, with a Birdsey 'bundle' patent No. 1,696,877 added covering a method of bundling gypsum board for shipment by binding several boards together into a stack through the application of a gummed tape lengthwise along the edges of the boards. Use of this bundling process was required by the contracts.
There remain to be described the litigation and negotiations leading up to the execution of certain 'November 1929 contracts' and the terms thereof.
In 1929 USG owned three applications for patents of Carlisle K. Roos covering cellular core gypsum board produced by the employment of foam or a foaming agent in the core of the board to produce a multitude of cells or voids thereby lightening the board, eliminating the use of sawdust, which had been an unsatisfactory material, as an 'aggregate,' and resulting in quicker drying. These applications were in interference with an application for a patent by Erick Christian Bayer, a foreign patentee, the American rights to whose patent had been acquired by USG. The Roos applications prevailed in the interference proceeding and Roos patents Nos. 2,017,022,
2,079,338, and 2,080,009
were ultimately issued to USG (October 8, 1935, May 4, 1937, and May 11, 1937, respectively). On May 23, 1929, after the last of the May 1929 license agreements had been executed, Avery of USG described the scope and nature of the Roos bubble board invention and outlined its advantages, including weight reduction, lower freight cost, elimination of the sawdust problem, easier handling and quicker drying, and offered the various licensees above referred to a license on this invention
Shortly after this, Universal through its president and co-receiver, Eugene Holland, claimed that USG, by using starch in its board to obtain adhesion between the core and paper liners, was infringing two patents owned by Universal known as the Hite and Haggerty patents Nos. 1,230,297 and 1,500,452, respectively. The Hite patent covered a heat insulating material and method of making the same. The Haggerty patent covered a gypsum plaster wallboard employing starch or a crooked carbohydrate in the core of the board to insure a good bond between the core and the paper covering sheets.
This had solved the 'peeler' trouble in the gypsum board industry and made possible modern high speed production of gypsum board. Without it, high temperatures used to expedite drying of the board would result in defective board in the form of 'peelers.' In 1927 Universal had brought suit in the United States District Court in Buffalo, New York, against National for infringing on the Haggerty patent, demanding an injunction and an accounting, and the court had ruled that the Haggerty patent was valid and infringed ( Universal Gypsum & Lime Co. v. Haggerty, D.C.W.D.N.Y.1927, 21 F.2d 544), and National had posted a substantial bond rather than suffer enforcement of a temporary injunction. Avery told Holland that it was not USG's policy to infringe patent rights and that he would investigate the claim. In June and July of 1929 negotiations were going on between USG and its various licensees in respect of a possible license covering the bubble board invention, and the various companies were investigating to ascertain whether the invention had merit. During this same period Holland continued to discuss with Avery separately the matter of the alleged infringement of the Haggerty and Hite starch patents. As a result of these discussions USG agreed to purchase and did purchase these patents. Universal was in receivership and the sale was a favorable one from its standpoint because it provided Universal with substantial funds permitting it to reorganize and emerge from receivership with its accounts paid. The original and ancillary proceedings were in seven different Federal district courts and the sale was approved by all of these courts on or about November 5, 1929. The sale was consummated in a license contract of November 5, 1929, which settled a claim of USG against Universal for infringement of USG's partially closed-edge patent and the claim of Universal against USG for infringement of the Hite and Haggerty patents.
The Hite and Haggerty patents were assigned to USG with reservation of royalty to Universal. Universal was itself granted a license under these patents and under the Birdsey patent No. 1,358,508 and under patents which might be issued under the Roos and Bayer applications and under numerous other patents. This license contract superseded the 1926 license agreement between USG and Universal. In August, 1929, USG had announced its arrangement to purchase the Haggerty and Hite patents and offered its licensees new licenses which would replace the prior license contracts and include in one document the outstanding patents of the earlier licenses, the Haggerty and Hite patents, and the applications for patents on the Roos bubble board invention. This offer was made subject to the approval of the district courts above referred to
As stated above, USG had in September, 1925, instituted a suit against American for infringement of USG's closed-edge patent. It had also in the same month commenced a suit against American for infringement of the Birdsey patent on partially closed-edge board. American attempted to obtain a more favorable settlement than had been granted to other infringers. USG's infringement suit with respect to the Birdsey patent had been postponed pending settlement negotiations, reinstated, and ultimately tried and decided in favor of USG. Settlement discussions by American were resumed, with renewed efforts to obtain concessions, with USG. On November 25, 1929, American finally settled its outstanding litigation with USG on the terms originally offered, i.e., on terms similar to those of the earlier settlements with other companies, and accepted a license from USG similar to the license contracts of the other licensees. American paid in settlement of past infringement approximately $ 152,000. On April 23, 1930, Kelley Plasterboard Company, Inc. (Kelley) took a similar license.
Texas did not enter into a license contract in 1929, but continued as a licensee under its license of April 11, 1927, although it was not subject to price control after August 6, 1929, the date of the expiration of the Utzman closed-edge patent. Upon the expiration on February 10, 1937, of its license of April 11, 1927, Texas accepted a further license contract similar in form to the November 1929 contract with the other licensees. This completed the execution of the nine contracts generally referred to in the record as the 'November 1929 contracts' (although the Texas contract was not executed until 1937 and the Kelley contract not until April 23, 1930) with Niagara, Certain-teed, National Ebsary, Atlantic, Universal, American, Kelley, and Texas. Each of these contracts extended licenses under the Haggerty and Hite patents, under patents which might be issued under the Roos and Bayer applications, and under a large number of patents still vital which had been the subject of the previous contracts, including the Utzman machine patent No. 1,330,413, Birdsey patent No. 1,358,508 on the partially closed -- edge board, the bundle patent No. 1,696,877, and under patents which might be issued under several additional applications for patents. These November 1929 contracts were in general in the same terms as the earlier contracts. Each contained a 'most favored nation' clause providing that if subsequent to the effective date of a particular agreement USG should grant to any other person, except to Universal, a license more favorable in terms, then USG would grant to the particular licensee a license on the same terms. The Texas contract alone in its 'most favored nation' clause did not contain the exception to Universal. The price fixing clause contained a provision that the minimum prices fixed by USG should not be more than those at which USG determined to sell gypsum board or other products embodying the inventions claimed in the patents to its own like trade in the same market. Use of the Birdsey bundling process by the licensees was made optional
It will be noted that the nine license contracts last above described involve only five of the named defendants -- USG, Certain-teed, National Ebsary, and Texas, leaving Celotex and Newark unmentioned. It will be noted also that the five companies -- Niagara, Atlantic, Universal, American, and Kelley -- parties to the November 1929 license contracts are not defendants. This is to be explained as follows: Niagara was acquired by USG in 1929. National acquired Universal in 1935 and Atlantic in 1936. Newark acquired the stock of Kelley in 1937 and merged with Kelley in 1939. Celotex acquired American in 1939. Upon acquiring these companies respectively National, Newark and Celotex took over the licenses which had been entered into by Universal, Atlantic, Kelley and American with USG.
In addition to the 1926-1927, May 1929, and November 1929, contracts which related to gypsum board as such, certain additional contracts, sometimes referred to in the record as 'subordinate contracts,' relating to metallized board and perforated lath, were executed as follows: At various times in 1934-1935 USG as owner of Roos patent No. 1,914,345 covering the use of metallic foil as a thermal insulating element in wallboard granted licenses to various other companies. The license contracts in evidence are those of National of October 5, 1934, Kelley of October 12, 1934,
Certain-teed of November 2, 1934, Atlantic of November 30, 1934, American of December 4, 1934,
Universal of April 4, 1935, and Ebsary of August 14, 1935. In these contracts USG granted licenses to make, use and sell plasterboard having a metallized surface embodying the inventions disclosed and claimed in the patents or patent applications covered by the contracts and reserved the right to fix the minimum prices on board embodying the inventions in question, but at not more than USG's own price in the same market. The licensees agreed to pay a royalty for all plasterboard having a metallized surface manufactured and sold by them and covered by the claims of the patents issued or to be issued under applications for patents. The licensees agreed not to sell metallized board to other board manufacturers except upon USG's written consent, and not to sell to anyone on consignment. They agreed to acknowledge and not to contest the validity of the patents issued or to be issued and to record the quantities of metallized board manufactured 'and/or sold,' USG reserving the right to inspect and copy such records. Each license was accorded the position of a 'most favored nation' with respect to licenses under these patents.
Similarly USG was the owner of Roos patent No. 1,938,354 covering a fire resistant plasterboard. This board had holes of given size punched through it at designated intervals. Upon application of a coat of plaster the same pushed its way through the holes and hardened into a mechanical key with consequent improvement of the fire resistant qualities of the wall in which such plasterboard was used. USG granted patent licenses to Certain-teed on June 8, 1936, American on July 10, 1936, Ebsary on February 2, 1937, and Kelley on June 23, 1937, for the manufacture, use and sale of this board. In substance the terms of these licenses were the same as those of the metallized board license contracts. Later USG offered a revised perforated lath license to its licensees royalty free, i.e., extended an offer to include the perforated board patent in the basic board license agreement at no additional royalty. Such revised licenses were accepted by Certain-teed, Ebsary and Kelley.
Minimum price bulletins were sent out by USG to its licensees under the various license contracts, except during the period from August 6, 1929 (the date of expiration of the Utzman product patent No. 1,034,746), until the date of the execution of the November 1929 contracts. The price bulletins are limited in their application to patented board manufactured and sold by the licensees under their respective license. The price on board was calculated on the basis of a mill price plus freight from the nearest mill (freight-wise) to the point of destination. The bulletins provided for prices on various quantities of board such as carloads, less-than-carloads, and truckloads. In particular markets, such as metropolitan areas, where it was economic to deliver gypsum board in truckload quantities, prices were established for such quantities and the areas in which such prices were to apply were defined. Outside of such areas a higher price was fixed. Provision was made in various instances for a variation in price to cover pool car shipments, railroad switching charges, and 'pick-ups' at a mill. The bulletins contained provisions purposed to prevent the violation of the minimum price requirements through such devices, in connection with a sale of board, as the giving away of board as 'dunnage,' making advertising allowances to the customer, granting of fictitious damage claims, splitting of commissions with the customer by commission salesmen, paying of unearned warehousing charges, fictitious hiring of customer's trucks, giving away of plaster or other products, or the sale of such products at a price unusually below the licensee's prevailing market price. there is set out in the margin a more detailed description of the price bulletins.
In 1932 USG set up as a department a wholly owned corporation called the Board Survey Company. Its function was to receive complaints of license violations, to investigate the facts, call them to the attention of the licensee involved, and upon occasion to the attention of the licensor USG. Board Survey Company was organized by USG for the purpose of bringing about compliance with the licenses. The licensees had no part in its formation, management or operation. From time to time a representative of USG, as licensor, met with representatives of the licensee companies for the purpose of explaining to them the provisions of the minimum price bulletins and for the purpose of securing adherence to such minimum prices by the licensees.
The defendants and their predecessors in interest were, at the time the license agreements were entered into, competitors in the manufacture and sale of substantially all of the gypsum board and a substantial part of the gypsum plaster made and sold in the 'Eastern area,' and the defendants now make and sell substantially all of the gypsum board and a substantial portion of the plaster in the 'Eastern area.' Sales of gypsum products are largely to retail dealers in building materials and mason supplies, rather than to building contractors and ultimate consumers.
The Government's complaint covers 33 closely printed pages, including 123 numbered paragraphs, and there is an appendix of an additional 94 pages. The charges are generalized in paragraphs 44 to 46(a), inclusive, of the complaint as follows:
'44. Defendants are, and have been for many years last past, parties to contracts in restraint of trade and commerce in gypsum board, plaster, and miscellaneous gypsum products among the several States, in violation of Section 1 of the Sherman Antitrust Act. Defendants are, and have been for many years last past, actively engaged in a continuing combination and conspiracy in restraint of trade and commerce in said gypsum products among the several States, in violation of Section 1 of the Sherman Antitrust Act. Defendants are monopolizing, and have monopolized for many years last past, trade and commerce in said gypsum products among the several States, in violation of Section 2 of the Sherman Antitrust Act. Defendants are, and have been for many years last past, attempting to monopolize trade and commerce in said gypsum products among the several States and are, and have been for many years last past, actively engaged in a continuing combination and conspiracy to monopolize trade and commerce in said gypsum products among the several States, in violation of Section 2 of the Sherman Antitrust Act. Defendants are, and have been for many years last past, parties to contracts in restraint of trade and commerce in said gypsum products between the States and the District of Columbia, in violation of Section 3 of the Sherman Antitrust Act. Defendants are, and have been for many years last past, actively engaged in a continuing combination and conspiracy in restraint of trade and commerce in said gypsum products between the States and the District of Columbia, in violation of Section 3 of the Sherman Antitrust Act. Said unlawful contracts, combination, conspiracy, monopoly, and attempt to monopolize will be referred to hereinafter as the combination.
'45. Said combination has been formed, has been carried out, and is being carried out by each of the defendant companies (acting, in part, through those of their officers and directors made defendants herein) and by other companies hereinafter referred to engaged in the manufacture of said gypsum products. Said companies have entered into, have carried out, and are carrying out said combination for the purpose, and with the effect, of restraining, dominating, and controlling the manufacture and distribution of said gypsum products in the Eastern area by:
'(a) Concertedly raising and fixing at arbitrary and non-competitive levels the prices of gypsum board manufactured and sold by said companies in the Eastern area;
'(b) concertedly standardizing gypsum board and its method of production by limiting the manufacture of board to uniform methods, and by producing only uniform kinds of board, for the purpose, and with the effect, of eliminating competition arising from variations in methods of production and in kinds of board manufactured and distributed in the Eastern area;
'(c) concertedly raising, maintaining, and stabilizing the general level of prices for plaster and miscellaneous gypsum products manufactured and sold by said companies in the Eastern area;
'(d) concertedly refraining from distributing gypsum board, plaster, and miscellaneous gypsum products manufactured by said companies through jobbers in the Eastern area, and concertedly refusing to sell said products to jobbers at prices below said companies' prices to dealers, for the purpose, and with the effect, of eliminating substantially all jobbers from the distribution of said gypsum products in the Eastern area;
'(e) concertedly inducing and coercing manufacturing distributors to resell, at the prices raised and fixed by said companies as aforesaid, gypsum board purchased from said companies.
'46. Said combination was entered into and has been, and is being, carried out by the defendant companies in part under the guise of numerous license agreements purporting to relate to the use of certain patents owned by the defendant U.S.G. in the manufacture of gypsum board. To give color of legality to said combination, the defendant companies, and other companies hereinafter named, concertedly agreed among themselves to enter into, and did enter into, said license agreements. Said license agreements are not bona fide patent license agreements reasonably designed to secure to U.S.G. the pecuniary reward for valid patent monopolies, but were entered into and executed for the illegal purposes described in paragraphs 44 and 45 hereof. The formation and operation of said combination is more fully set forth in paragraphs 47 to 120 hereof.
'(a) Many of the patents mentioned and described in said license agreements by which the said combination has been, and is being carried out in part, are process or machine patents. The said patents mentioned and described in the said license agreements, even assuming they are valid, are not basic article or product patents and do not singly or all together cover completely the business of mining and selling gypsum, or cover completely gypsum board, which is one of the forms in which unpatented gypsum is sold by the defendants, but at most constitute minor additions to the established and unpatented art of making gypsum board and afford no legal justification for the said combination.'
Paragraphs 47 to 120 of the complaint detail the generalized charges above set forth. It is not possible to state this detail within a reasonably limited space, but it will be of some aid to an understanding of the questions presented by the motions now before the court if these paragraphs are summarized. They allege that:
The combination was formed during the period between September, 1925, and early in the year 1930. The plan for stabilization of prices grew out of the efforts of the parties to the early patent infringement disputes to settle their differences. Avery as president of USG, Blagden as president of Beaver, and Griswold as vice-president of American decided to induce the industry to enter into license agreements containing price fixing provisions under USG's dominant Utzman closed-edge board patents. Blagden and Griswold agreeing to act as contact men with the industry. In negotiations in 1926 the industry responded favorably, but there was disagreement over the terms of the proposed licenses and only Beaver and Universal signed agreements in that year; but further efforts of the proponents of the plan resulted in the signing of the contracts in 1927 by Atlantic and Texas. Increasing competition in the industry, and declining prices for all gypsum products during 1927 and 1928, revived interest in price stabilization, and Holland as president of Universal agreed with Avery to promote the stabilization plan. From time to time in the latter part of 1928 and the early part of 1929 conferences and meetings were held by companies not yet licensed. The Utzman patent on closed-edge licensed. The Utzman patent on closed-edge board was to expire, however, in August, 1929, and in view of that fact Avery for USG assured prospective licensees that, if the agreements proposed were signed, USG would look for an additional patent under the color of which prices could be controlled. In reliance upon this assurance Certain-teed, National, Ebsary, and Niagara signed the May 1929 contracts. But not all of the agreement between USG and these companies was put into formal writing. On the contrary, in addition to the signed license agreements, informal side agreements were made between USG and its licensees that they would discontinue making unpatented open-edge board and second-class closed-edge board; that they would dispose of inventories of such board at prices fixed by USG; that thereafter they would manufacture and sell a closed-edge board manufactured and bundled by the processes and methods used by USG; that USG would advance and stabilize the prices for board; that all companies would increase their prices for other gypsum products; and that USG would continue to control prices through the use of other patents after expiration of the Utzman product patent in August, 1929.
Immediately after the May 1929 license contracts were executed USG, pursuant to its agreement to find a patent under which to continue price control, offered additional licenses under the foam process. Universal then sought to induct USG to purchase the Hite and Haggerty starch patents by a claim that the use of farinaceous paste in the foam process infringed them. USG knew that this claim had no basis in fact, and knew also that there were other and non-infringing methods of reinforcing the bubbles in the foam, and had advised its licensees to that effect. Nevertheless, the sale by Universal to USG was agreed to and consummated and the November 1929 contracts were signed -- all for the purpose of giving color of legality to price control by USG pending issuance of patents under the foam process. Again, in addition to the former writings, there were side agreements to the effect that the use of adhesives in the manufactures of board to increase the bond between core and liners -- there had been such use for many years prior to 1929 by the licensees other than Ebsary and Kelley -- would be considered to fall within the scope of the Hite and Haggerty patents for the purpose of permitting price control by USG during the life of these patents; that Ebsary and Kelley would commence to use adhesives for the same purpose; and that the licensees, licensees, as soon as they could equip their plants, would manufacture and bundle by substantially the same processes as those employed by USG.
USG and certain of its licensees entered into separate patent license agreements relating to metallized board and perforated lath, for the purpose of extending and strengthening the operation of the basic license agreements.
At the time of the execution of the metallized board agreements, during 1934-1935, none of the licensees, except National, intended to manufacture such board, but, as USG well knew, to purchase it from USG or National for resale to dealers and consumers; USG, notwithstanding this, required the licensees to execute these agreements in order to be enabled to purchase metalized board for resale; USG fixed the minimum prices and terms and conditions of sale of metalized board with the knowledge and notwithstanding the fact that a substantial part thereof sold by the licensees, except National, was purchased from National and USG. USG, as an inducement to the licensees to sign the perforated lath contracts in 1936-1937, agreed to fix prices on such lath at a differential above plain lath; the agreements were signed in reliance upon this inducement and USG fixed the prices at a differential above the price of plain lath, and the licensees sold perforated lath at such prices. At the time of the execution and throughout the period of operation under the perforated lath contracts, USG, Certain-teed, and American were informed, sometimes by patent counsel, and believed, that the perforated lath patent was void; and the companies entered into these license agreements principally for the purpose of enabling USG to fix the prices of perforated lath sold by it and its licensees. These agreements were not bona fide license agreements, and the exercise of price control by USG under them was not reasonably adapted to protect the pecuniary rewards of a patentee under a lawful patent monopoly
In paragraphs 121 to 123 of the complaint the alleged effect of the combination is stated. It is, in substance, charge that:
By means of the combination the defendants have controlled and dominated for more than ten years the manufacture and distribution of 100 percent of the gypsum board and 80 percent of the plaster and miscellaneous gypsum products manufactured and sold in the 'Eastern area,' and they will continue to do so, unless restrained, until 1954 when the last of the USG patents on the foam process expires. Since 1929 all gypsum board sold by all manufacturers and manufacturing distributors in the 'eastern area' has been sold at uniform and non-competitive prices dictated by USG, with resultant elimination of price competition in the distribution of gypsum board from manufacturers to dealers. For the purpose of maintaining these uniform and non-competitive prices, the defendants have standardized the manufacture of board, have limited its distribution to themselves and certain manufacturing distributors, and have eliminated wholesale distributors who might fail to maintain such prices. The uniform and non-competitive prices have been, throughout the period of the operation of the combination, substantially higher than those prevailing at the time of its formation in 1929, and have failed to reflect substantial reductions in manufacturing costs. Each of the defendants has thereby realized substantial profits. The uniformity among the defendants in the distribution of gypsum board has reflected itself in uniformity in the distribution of plaster and miscellaneous gypsum products by the defendants. They now distribute certain products on the basis of many of the terms and conditions of sale prescribed by USG for gypsum board.
It will be seen that the charges above summarized reduce themselves in essence to the following: (1) that the license contracts entered into between the defendant USG, as licensor, and the other defendants, as licensees, are themselves illegal as in restraint of trade in view of the nature of the patents upon which the contracts are based, in view of the fact that USG and the plurality of defendant licensees manufacture all of the gypsum board in the 'Eastern area,' and in view of the terms and conditions of the contracts, including those providing for the establishment of minimum prices on patented gypsum board to be made and sold by the defendants. (2) That the license contracts, even if valid on their face, were not entered into as bona fide license agreements, reasonably designed to secure to USG the pecuniary reward for valid patent monopolies, but were executed by the defendants merely to give color of legality to a combination to restrain trade, by control of the prices and terms and conditions of sale of gypsum board, plaster, and miscellaneous gypsum products throughout the gypsum industry. (3) That the defendant's operations were carried beyond the proper limits of a patent monopoly and licensing thereunder by raising and fixing at arbitrary and non-competitive levels the price of gypsum board made and sold by the defendants, by improper standardization of gypsum board and its method of production, by raising, maintaining and stabilizing the level of prices of unpatented materials -- plaster and miscellaneous gypsum products -- by effectuating improper restriction upon distribution of gypsum board, plaster and miscellaneous gypsum products, and by fixing the prices at which manufacturing distributors resold gypsum board.
The theory of the Government's charge, with respect to connecting the various defendants with the violations of law alleged, is that as each defendant became a party to a license agreement, either immediately or through acquisition of a company already licensed, it did so with knowledge of the existence and operation of the combination and thereby became a party thereto.
The defendant's answers to the charges made in the complaint cover 165 pages including 638 paragraphs. It is not possible in reasonable space to state the answers in detail. They may be generalized as follows:
The defendants admit the execution of the 1926-1927, May 1929, and November 1929, patent license agreements, and admit the fixing of prices thereunder by USG upon gypsum board and lath manufactured and sold under such contracts, by virtue of price bulletins sent out by USG from the date of execution of the several license agreements until July 8, 1941, except for the period from August 6, 1929, the date of expiration of the Utzman closed-edge board patent, No. 1,034,746, to the date of the execution of the November 1929 contracts, and except that Texas was sent no bulletins from August 6, 1929, to February 10, 1937, the date of execution of its second license contract. The defendants admit that they sold such gypsum board at the prices stated in the bulletins. The defendants USG, National, Certain-teed, Ebsary, and Newark admit the execution of the metallized board contracts and admit that USG determined minimum prices for board manufactured and sold under such contracts from the date of their execution until the date of the filing of the complaint. The defendants USG, Certain-teed, Ebsary, and Newark admit the execution of the perforated lath contracts and admit that USG determined minimum prices for board manufactured and sold under those contracts from the date of their execution until May, 1938. But the defendants deny that they have violated Sections 1,2, and 3 of the Sherman Act, or any of such sections, by being parties to contracts in restraint of trade and commerce, or by combining and conspiring to restrain trade and commerce, or by attempting to monopolize and monopolizing trade and commerce in gypsum board, plaster, and miscellaneous gypsum products, or in any manner charged in the complaint, or at all. They deny the allegations of paragraph 46 of the complaint to the effect that the license agreements were entered into by concerted action to give color of legality to the combination and that they were not bona fide license agreements, reasonably designed to give to USG the pecuniary reward for valid patent monopolies; they assert that on the contrary the license agreements were bona fide in both law and fact and were reasonably designed to secure to USG the pecuniary reward to which it was entitled for its valid patent monopolies. The defendants admit the setting up by USG in 1932 of the Board Survey Company as a wholly owned corporation whose function was to bring about compliance with the licenses, but they assert that the licensees had no part in the formation, management, or operation of this company. The defendants admit that from time to time the licensor met with the licensees for the purpose of explaining the provisions of the minimum price bulletins with respect to patented gypsum board and securing adherence to the minimum prices by the licensees; but they assert that all discussion at these meetings was limited to patented gypsum board, that the prices of plaster or unpatented products were never discussed, and that there was never any agreement reached among those in attendance as to what should or should not be done as to a particular matter. The defendants deny that any side agreements were entered into. The denials of the defendants with respect to monopoly do not include a denial that within the group of defendants there is manufactured and sold substantially all of the gypsum board produced and sold in the 'Eastern area.' The contention of the defendants in this respect is that to the extent that they have a 'monopoly' upon the production and sale of gypsum board, the same is legitimatized by the patent license agreements. The defendants deny that the license agreements and the operations thereunder were applied to unpatented plaster and miscellaneous gypsum products, to purchased board, to standardization of products, to the elimination of jobbers and non-conforming wholesalers, or to the fixing of resale prices of manufacturing distributors.
The answers will be further detailed as is necessary in the discussion to follow.
The instant proceeding was filed on August 15, 1940.
A three-judge court was constituted on September 15, 1942. Preliminary to trial the Government propounded to the defendants 361 interrogatories,
to many of which objections were filed. Hearings were had and rulings made on these objections. Thereafter the defendants, by virtue of amended answers containing pleas of res judicata based upon a disposition favorable to the defendants therein of the criminal case first described in the margin, filed motions for summary judgment. These motions were argued orally and briefs were submitted, and the motions were denied on August 10, 1943 (51 F.Supp. 613). Thereafter the defendants moved to strike, or alternatively for partial judgment dismissing, paragraph 46(a) of the Government's complaint as amended, which paragraph presented an issue as to the validity of certain of the patents upon which the nOvember 1929 license agreements were based. These motions were orally argued and briefs were submitted upon them, and an order was entered on November 15, 1943 (53 F.Supp. 889), dismissing all of the Government's claim contained in paragraph 46(a) except the first and last sentences thereof
The instant case came on for trial on November 15, 1943, and continued, with some intermissions, until the close of presentation of evidence by the Government on April 20, 1944. The testimony of 28 witnesses was heard and 641 exhibits, mostly of a documentary character, were received in evidence. Much of the testimony and most of the exhibits (448) were received in evidence subject to connection; 86 exhibits were offered but rejected. The record comprises since the commencement of the actual trial 7585 pages, exclusive of the exhibits. The latter comprise several thousand additional pages. At the close of the Government's case the defendants moved to strike from the record all of the exhibits and testimony received subject to connection, on the ground that no prima facie showing of any conspiracy had been made, that such exhibits and testimony had not been shown to be in furtherance or in execution of any conspiracy, and that such exhibits had not otherwise been connected. The defendants moved also to dismiss the complaint with prejudice under Rule 41(b) of the Federal Rules of Civil Procedure, 28 U.S.C.A.following section 723c, on the ground that upon the facts and the law the plaintiff had shown no right to relief. Briefs were submitted in advance of oral argument in support of and opposition to the motions. After oral argument the motions were submitted and taken under advisement on May 29, 1944. On June 6, 1944, additional briefs were filed, and on January 17, 1945, the court requested further briefs. The last of these was filed on March 14, 1945.
We proceed to discussion of the several questions of law and fact raised by the motions.
THE DUTY OF THE COURT ON MOTIONS TO DISMISS UNDER RULE 41(b) OF THE FEDERAL RULES OF CIVIL PROCEDURE
At the threshold there must be discussed the question of the duty of the court on motions to dismiss under Rule 41(b). The rule provides, so far as here pertinent:
'* * * After the plaintiff has completed the presentation of his evidence, the defendant, without waiving his right to offer evidence in the event the motion is not granted, may move for a dismissal on the ground that upon the facts and the law the plaintiff has shown no right to relief. Unless the court in its order for dismissal otherwise specifies, a dismissal under this subdivision and any dismissal not provided for in this rule, other than a dismissal for lack of jurisdiction or for improper venue, operates as an adjudication upon the merits.'
The defendants assert that under this rule it is the duty of the court to weigh the evidence, to draw inferences therefrom, and, if it finds the evidence insufficient to make out a case for the plaintiff, to render a decision for the defendant on the merits and make findings of fact and conclusions of law. To the contrary, the Government contends that 'The sole question presented to the trial judge by such a motion is one of law, namely, whether the plaintiff's evidence and all the inferences fairly to be drawn from it, considered in the most favorable light, make out a prima facie case for relief. . . .'
This contention is, in effect, that the court should conduct itself under a motion to dismiss under Rule 41(b) as would a court in a jury trial on a defendant's motion for a directed verdict at the close of the plaintiff's case. We think that this is not correct, but that the duty of the court is that asserted by the defendants as above stated. The so-called prima facie case rule governing the action of judges in jury trials rests upon the established division of functions, in such proceedings, between jury and judge whereby the jury tries the facts and the judge determines the law. The judge, before verdict, has no function as to the facts except in the limited sense of determining whether there is #a case for the jury.' If there is substantial proof of the elements of the plaintiff's charge, the case must go to the jury, even if the judge, if he were the trier of the facts, would himself decide the case against the plaintiff. Putting it otherwise, a judge in a jury trial does not withdraw a case from the jury on a defendant's motion at the end of the plaintiff's case unless the judge can fairly say that no reasonable juryman could find for the plaintiff. Pennsylvania R. Co. v. Chamberlain, Sec. 228 U.S. 333, 53 S. Ct. 391, 77 L. Ed. 819; Gunning v. Cooley, 1930, 281 U.S. 90, 50 S. Ct. 231, 74 L. Ed. 720; Baltimore & Ohio R. Co. v. Groeger, 1925; 266 U.S. 521, 45 S. Ct. 169, 69 L. Ed. 419; Slocum v. New York Life Ins. Co., 1913, 228 U.S. 364, 33 S. Ct. 523, 57 L. Ed. 879, Ann. Cas. 1914D, 1029; Jackson v. Capital Transit Co., 1938, 69 App.D.C. 147, 99 F.2d. 380, certiorari denied 1939, 306 U.S. 630, 59 S. Ct. 464, 83 L. Ed. 1032; Hopkins v. Baltimore & Ohio R. Co., 1936, 65 App.D.C. 167, 81 F.2d 894.
But in an action tried without a jury the judge is the trior of both the facts and the law. This fundamental distinction between jury and non-jury trials should not be ignored; and if the reason for the jury trial practice does not exist in non-jury trials, where the judge is the trier of the facts, the jury trial practice ought not to be applied but should give way in favor of a practice consistent with the actual function of the judge in non-jury cases and consistent with the spirit of the Federal Rules of Civil Procedure. Rule 1 expressly provides that the rules 'shall be construed to secure the just, speedy, and inexpensive determination of every action.' Therefore, a court should dispose of a case at the first opportunity which is appropriate under the rules and in accord with the rights of the parties. When a court sitting without a jury has heard all of the plaintiff's evidence, it is appropriate that the court shall then determine whether or not the plaintiff has convincingly shown a right to relief. It is not reasonable to require a judge, on motion to dismiss under Rule 41(b), to determine merely whether there is a prima facie case, such as in a jury trial should go to the jury, when there is no jury -- to determine merely whether there is a prima facie case sufficient for the consideration of a trier of the facts when he is himself the trier of the facts. To apply the jury trial practice in non-jury proceedings would be to erect a requirement compelling a defendant to put on his case and the court to spend the time and incur the public expense of hearing it if the plaintiff had, according to jury trial concepts, made 'a case for the jury,' even though the judge had concluded that on the whole of the plaintiff's evidence the plaintiff ought not to prevail. A plaintiff who has had full opportunity to put on his own case and has failed to convince the judge, as trier of the facts, of a right to relief, has no legal right under the due process clause of the Constitution, to hear the defendant's case, or to compel the court to hear it, merely because the plaintiff's case is a prim facie one in the jury trial sense of the term. Porter v. Wilson, 1915, 239 U.S. 170, 36 S. Ct. 91, 60 L. Ed. 204. In Lambuth v. Stetson & Post Mill Co., 1896, 14 Wash. 187, 44 P. 148, a lawsuit in which a jury had been waived, the defendant moved for a nonsuit and dismissal after the plaintiff had put in his evidence and rested. The motion was granted because in the view of the trial judge a fair preponderance of the proof established facts which prevented recovery by the plaintiff. On appeal the plaintiff claimed that the trial judge had no right to weigh the evidence. The Supreme Court of Washington rejected this contention and, in doing so, stated:
'But, where the entire trial is before the court which must finally pass upon the law and facts of the case, there is no good reason why it should not be allowed to determine the facts necessary to a proper application of the law at any time during the trial. It would be worse than useless for the court, after its attention had been called to the insufficiency of the evidence offered by the plaintiff to establish the facts necessary to enable him to recover, and after being satisfied that such was the nature of the evidence introduced by the plaintiff, to require the defendant to put in evidence to disprove that which had been already sufficiently disproved.
'When the trial is before a jury, the court cannot weigh the testimony upon a motion for a non-suit, for the reason that it cannot weigh it at any time; but when the trial is without a jury, the court must eventually weigh the testimony for the purpose of determining where the preponderance is, and there is no reason why it should not so weigh it at the earliest possible time when the rights of the plaintiff will not be cut off by its so doing; and when the plaintiff has introduced all of his proof and rested, no right of his will be cut off if the court then determines what has been proven. It cannot be presumed that plaintiff's case will be strengthened by the evidence put in by the defendant. If, when plaintiff had submitted his evidence, the defendant had rested without putting in any proof, it is clear that the court would have had to determine the questions of fact made by the pleadings upon a preponderance of the testimony. Hence, under the rule contended for by the appellant, the court might be put in the anomalous position of denying the motion for a non-suit, and immediately thereafter, upon the refusal of the defendant to put in any proof, deciding the case in his favor.
'No good purpose could be subserved by refusing to a trial court the right to determine the law in the light of the evidence upon a motion for a non-suit, the same as upon final submission.
'It was the right of the court, upon the motion for non-suit, to decide as to the preponderance of the evidence, and it having decided that such preponderance was with the defendant, and there having been testimony to support such finding, the judgment rendered thereon must be affirmed.' (14 Wash. at pages 190-191, 44 P. at page 149)
The Government attacks this reasoning upon the ground that it has no application to a conspiracy case such as the instant case where, according to the Government, 'most of the plaintiff's evidence * * * has to come from hostile or quasi hostile witnesses. In such cases the plaintiff makes no effort to put in more than a prima facie case in the first instance, recognizing that when the defendants put on their witnesses many additional facts may be brought out. . . . ' No proper distinction can be drawn under the Federal Rules of Civil Procedure between a plaintiff's burden in a conspiracy case and in other cases. The argument of the Government assumes that a plaintiff has some vested or due process interest in hearing the defendant's witnesses and seeing the defendant's documentary evidence, even though the plaintiff has not been able to establish his own case. This assumption has been rejected, as above pointed out, by the Supreme Court in Porter v. Wilson, supra. The argument is especially lacking in cogency in view of Rules 43(b) and 26 to 37, inclusive, of the Federal Rules of Civil Procedure. These permit a party to call an adverse party and interrogate him by leading questions and contradict and impeach him, and also permit a party to call an officer, director, or managing agent of a public or private corporation, or of a partnership or association which is an adverse party, and cross-examine and contradict and impeach him in all respects as if he had been called by the adverse party. These rules also permit depositions pending action, interrogatories to parties, discovery and production of documents and things for inspection, copying, or photographing, and requests for admissions of facts and of genuineness of documents. These rules were availed of in the instant case. Most of the Government's evidence came either from the lips of officers or employees of the defendants, or from documents obtained from the files of the defendants.
The Notes to the Federal Rules of Civil Procedure state, concerning Rule 41 (b):
'... This provides for the equivalent of a nonsuit on motion by the defendant after the completion of the presentation of evidence by the plaintiff. Also, for actions tried without a jury, it provides the equivalent of the directed verdict practice for jury actions which is regulated by Rule 50.'
The Government, in arguing for the 'prima facie case' construction of the rule, emphasizes the statement that a motion to dismiss under Rule 41(b) is 'the equivalent of the directed verdict practice for jury actions which is regulated by Rule 50.' But this statement carries the 'equivalence' of motions under the two rules unduly far, indeed begs the question which is under discussion. Rule 50(a) provides:
'. . . A party who moves for a directed verdict at the close of the evidence offered by an opponent may offer evidence in the event that the motion is not granted, without having reserved the right so to do and to the same extent as if the motion had not been made. . . . ' Motions under Rules 41(b) and 50(a) are similar in that a motion under either rule leaves the defendant with a right to present his own case if the decision on his motion goes against him; and the motions under the two rules are similar in that both provide a defendant with a method of mid-trial attack upon the plaintiff's case, and a means of determining whether or not the defendant must present his evidence. But beyond these likenesses, motions under Rule 41(b) and Rule 50(a) should be assimilated only so far as it consonant with reason and with the spirit of the Federal Rules of Civil Procedure. To say that Rule 41(b), applying to non-jury cases, provides the equivalent in all respects of motions for a directed verdict in jury trials under Rule 50(a) is to ignore the difference between the functions of the judge in jury cases where the judge is not the trier of the facts and in non-jury cases where he is the trier of the facts.
The Government argues further that Rule 41(b) should be interpreted to require only a jury trial method of viewing the evidence at the end of the plaintiff's case for the reason that as a matter of trial convenience this will save time; otherwise, urges the Government, a judge must 'twice weigh the evidence,' if (it is assumed the Government means) the defendant's motion to dismiss is denied. But this is an unavoidable incident of permitting a mid-trial motion. It is true that under the construction here put upon Rule 41(b) the judge will have to evaluate the plaintiff's evidence, and if he concludes that it substantially supports the plaintiff's cause of action and therefore denies the motion and hears the defendant's case, the judge will then be required again to consider the plaintiff's evidence, in comparison with that of the defendant. But some such burden as this is unavoidable, even under the construction of Rule 41(b) urged by the Government. For if at the close of the plaintiff's evidence the court on a defendant's motion to dismiss, determining merely whether there is such evidence as would warrant sending the case to a jury and finding that there is, denies the motion and puts the defendant to his proof, then at the close of the defendant's case the judge will have to weigh the plaintiff's evidence against that of the defendant; while the judge's first consideration of the plaintiff's evidence will not be technically a weighing of it, but more accurately speaking a survey, nevertheless the judge will have given consideration to the plaintiff's evidence twice.
There is no authority in this jurisdiction on the question under discussion. Elsewhere there is a division. Supporting the position taken here are the following: Gary Theatre Co. v. Columbia Pictures Corp., 7 Cir., 1941, 120 F.2d 891; Bach v. Friden Calculating Machine Co., 6 Cir., 1945, 148 F.2d 407; Young v. United States, 9 Cir., 1940, 111 F.2d. 823; cf. United States v. Blauner Construction Co., D.C.D.Mass. 1941, 37 F.Supp. 968.
The cases relied upon by the Government to support its contention concerning Rule 41(b) are: Federal Deposit Ins. Corp. v. Mason, 3 Cir., 1940, 115 F.2d 548; Schad v. Twentieth Century-Fox Film Corp., 3 Cir., 1943, 136 F.2d 991; Shaw v. Missouri Pac. R. Co., D.C.W.D.La. 1941, 36 F.Supp. 651; id., D.C.W.D.La.1941, 39 F.Supp 652. See also Reich v. Vegex, 3 Cir., 1943, 137 F.2d 647. Of these cases it is necessary to discuss only Federal Deposit Ins. Corp. v. Mason and Schad v. Twentieth Century-Fox Film Corp. The second of these is based in part upon the first, and the others mentioned proceed upon the same theory as do these two cases. The decision in Federal Deposit Ins. Corp. v. Mason was based solely upon the statement in the Notes to the Federal Rules of Civil Procedure that for actions tried without a jury Rule 41(b) provides #the equivalent of the directed verdict practice for jury actions which is regulated by Rule 50.' Schad v. Twentieth Century-Fox Film Corp. was based in part upon the position just expressed, but in addition upon the view that if Rule 41(b), it does not contemplate not making findings of fact in the event that a motion is denied. The court concluded from this that if a judge in a non-jury proceeding is to weigh the evidence on a motion to dismiss at the close of the plaintiff's case, he must, under Rule 52(a), in the event of the denial of the motion, make findings of fact in the plaintiff's favor, and this before hearing the defendant's evidence, with the consequence, the court thought, of possible denial of due process to the defendant. In both of these cases the court fails to take account of the difference between a court's function in jury proceedings and in non-jury proceedings. Schad v. Twentieth Century-Fox Film Corp. is, moreover, wrong in its view of the requirement of Rule 52(a) concerning findings of fact. That rule provides, so far as here pertinent:
'. . . In all actions tried upon the facts without a jury, the court shall find the facts specially and state separately its conclusions of law thereon and direct the entry of the appropriate judgment . . . .' When this is read in connection with Rule 41(b), it is clear that findings of fact are not to be made upon denial of a motion to dismiss. Under Rule 41(b) it is dismissal, not refusal to dismiss, that operates 'as an adjudication upon the merits' and entitles a party to 'entry of the appropriate judgment.' If a motion to dismiss is denied, the mid-trial attack allowed the defendant has failed and the case is not complete. No final adjudication on the merits can be made, therefore, until the defendant's case has been heard and evaluated by the judge in comparison with the case of the plaintiff. It would, therefore, be useless to make findings of fact upon denial of a motion to dismiss. It may be noted, however, that even if Rule 52(a), read in connection with Rule 41(b), be construed as requiring findings of fact upon the denial of a motion to dismiss, there could hardly be denial of due process to the defendant in the making of such findings. Findings of fact under such circumstances would be merely interlocutory. It is not to be assumed that a trial judge is incapable, after hearing a plaintiff's case and determining from it alone that the plaintiff would be entitled to prevail, of holding his mind open to hear the defendant's evidence before reaching a final determination as to the rights of the two parties. We conclude that under rUle 41(b) it is the duty of the court to weigh the evidence, to draw inferences therefrom and, if it finds the evidence insufficient to make out a case for the plaintiff, to render a decision for the defendant on the merits.
Once this view is taken it is clear that it becomes the duty of the court, on granting a motion to dismiss under Rule 41(b), to make findings of fact. Rule 52(a) requires findings of fact and conclusions of law 'In all actions tried upon the facts without a jury.' Obviously, if the defendant were to rest his case at the time he made his motion to dismiss, the court on granting the motion would be under a duty to make findings. Under Rule 50(a) the defendant is not required to rest; he has a right to offer evidence in the event his motion to dismiss is denied. But the existence of this right is not persuasive that the court is not to make findings of fact if, under the view here taken of Rule 41 (b), the defendant, without resting, moves to dismiss and the court grants the motion. A case has been 'tried upon the facts' when the plaintiff's evidence, weighed by the judge, has been found insufficient. A dismissal under Rule 41(b) operates 'as an adjudication upon the merits.' Attention is called to the fact that in three of the cases (to wit, Gary Theatre Co. v. Columbia Pictures Corp., United States v. Blauner Construction Co., and Young v. United States) cited above as supporting the position here taken on the duty of the court on a motion to dismiss under Rule 41(b), findings of fact were made under Rule 52(a) on the granting of a motion to dismiss; and in the fourth case cited (Bach v. Friden Calculating Machine Co.), where the trial court failed to make findings of fact, the Circuit Court of Appeals required them to be made. The argument of the Government against making findings of fact hangs from its view, which we here reject, that on a motion to dismiss under Rule 41(b) the court does not weigh the evidence but merely follows the jury trial practice of determining whether or no a prima facie case has been established. There would, of course, be little point in making findings of fact on the decision of the mere 'question of law' whether a plaintiff, if his evidence and legitimate inferences to be drawn therefrom are looked at in the most favorable light, has made a case sufficient to present to a jury if the proceeding were a jury proceeding.
If the court decides on a motion to dismiss under Rule 41(b) that upon the facts and the law the plaintiff has shown no right to relief, conclusions of law, as well as findings of fact, must be made under Rule 52(a), and the court must direct the entry of the appropriate judgment, i.e., a judgment of dismissal on the merits.
We proceed to consider and weigh the evidence, pausing first, however, to determine a paramount question of law.
THE LEGALITY OF THE LICENSE AGREEMENTS
Are the patent license contracts described in the statement of facts at the outset of this opinion lawful: This question is to be answered in the light of the nature of the principal patents upon which the agreements were founded (the Utzman, Roos and Haggerty patents), in the light of the fact that the defendants make and sell substantially all of the gypsum board in the 'Eastern area,' and in the light of the terms and conditions of the license agreements, including especially the provisions for establishment and protection by USG of minimum prices on patented gypsum board manufactured and sold by the licensees. This question must be answered in the affirmative if no material distinction exists between the instant case and United States v. General Electric Company, 1926, 272 U.S. 476, 47 S. Ct. 192, 71 L. Ed. 362.
Prior to 1912 in a suit between the United States and the three defendants in the General Electric case and thirty-two other corporations, a consent decree was entered dissolving, as illegal, a combination charged with restraint of interstate commerce in electric lamps, and enjoining fixing of resale prices for purchasers, but permitting the owner of patents to fix the prices at which a licensee should sell lamps. In 1912, after the consent decree, a new plan was evolved by General Electric whereby through a comprehensive system lamps were distributed directly to the consumer. Recognizing that the plan was devised to enable General Electric 'to deal directly with consumers and purchasers, and . . . to avoid selling the lamps owned by the (General Electric) company to jobbers or dealers, and prevent sale by these middle men to consumers at different and competing prices,' the Court said that the question (in this first aspect of the case) is 'whether, in view of the arrangements, made by the company with those who ordinarily and usually would be merchants buying from the manufacturer and selling to the public, -- such persons are to be treated as agents, or as owners of the lamps consigned to them under such contracts.' (272 U.S.at pages 483, 484, 47 S. Ct.at page 194, 71 L. Ed. 362) The Court reviewed the provisions of the contracts for distribution and held they were bona fide agency agreements and that they involved no sale to the agents and hence no resale price fixing. That the decision in this aspect of the case did not turn upon the fact that a patented article was involved was made clear by the statement of the Court that 'there is nothing as a matter of principle, or in the authorities, which requires us to hold that genuine contracts of agency like those before us, however comprehensive as a mass or whole in their effect, are violations of the Anti-Trust Act. The owner of an article, patented or otherwise, is not violating the common law, or the Anti-Trust law, by seeking to dispose of his article directly to the consumer and fixing the price by which his agents transfer the title from him directly to such consumer.' (272 U.S.at page 488, 47 S. Ct.at page 196, 71 L. Ed. 362)
The second question in the case arose out of the following facts. General Electric was the owner of three patents, the Just & Hanaman 'basic' patent of 1912 for the use of tungsten filaments in the manufacture of electric lamps, the Coolidge patent of 1913 covering a process of manufacturing tungsten filaments by which their tensile strength and endurance were increased, and the Langmuir patent of 1916 for the use of gas in electric lamp bulbs to increase the intensity of the light. These three patents, so the Court stated, 'cover completely the making of the modern electric lights with the tungsten filaments, and secure to the (General) Electric Company the monopoly of their making, using and vending.' (272 U.S.at page 481, 47 S. Ct.at page 193, 71 L. Ed. 362) The nature of these patents and their relation to the art are detailed later in this topic. The license, founded upon the foregoing patents (and others), granted by General Electric to Westinghouse, in consideration of royalties to be paid, the right to manufacture, use and sell electric lamps having tungsten filaments, and contained certain restrictive provisions as to the prices, terms and conditions under which Westinghouse might sell the product made under the license. The detailed provisions of the license will also be discussed below. Additional licenses of none price fixing character but containing quantity restrictions were granted to persons other than Westinghouse; these licenses will be adverted to below. The Government contended that the license to Westinghouse not only obligated that company to follow the prices, terms and conditions of sale to be fixed from time to time by General Electric and observed by it, but also required Westinghouse to adopt the General Electric agency distribution plan. Westinghouse had, as a matter of fact, adopted the agency plan of distribution and had followed the same restrictions in the case of its own agents as those prescribed by General Electric, but it contended that it was not required to do so. The Court considered this point of dispute immaterial, saying: 'It does not appear that this provision was express in the license, because no such plan was set out therein; but even if the construction urged by the Government is correct, we think the result must be the same.' (272 U.S.at page 489, 47 S. Ct.at page 196, 71 L. Ed. 362)
By unanimous decision the Court sustained the validity of the General Electric-Westinghouse license. It held that the restrictive provisions were not violative of the Sherman Act. In reaching this conclusion, the Court analyzed the rights of the owner of a patent, recognized that a patentee's right to acquire a profit by the price at which the product is sold is a substantive right, and held that the terms and conditions contained in the license were such as were reasonably adapted to secure to the owner of the patent the pecuniary reward to which he is entitled. The Court necessarily passed upon the validity of the restrictions in the license because they were a part of the license contract which was before the Court.
Further reference to the license agreement is made later. In discussing the rights of a patent owner, the Court said
'The owner of a patent may assign it to another and convey, (1) the exclusive right to make, use and vend the invention throughout the United States, or, (2) an undivided part or share of that exclusive right, or (3) the exclusive right under the patent within and through a specific part of the United States. But any assignment or transfer short of one of these is a license, giving the licensee no title in the patent and no right to sue at law in his own name for an infringement. Waterman v. Mackenzie, 138 U.S. 252, 255 (11 S. Ct. 334, 34 L. Ed. 923): Galer v. Wilder, 10 How. 477, 494, 495 (13 L. Ed. 504): Moore v. Marsh, 7 Wall. 515 (19 L. Ed. 37), and Crown (Die and tOol) Company v. Nye Tool (& Machine) Works, 261 U.S. 24, 30 (43 S. Ct. 254, 67 L. Ed. 516). Conveying less than title to the patent, or part of it, the patentee may grant a license to make, use and vend articles under the specifications of his patent for any royalty or upon any condition the performance of which is reasonably within the reward which the patentee by the grant of the patent is entitled to secure. It is well settled, as already said, that where a patentee makes the patented article and sells it, he can exercise no future control over what the purchaser may wish to do with the article after his purchase. It has passed beyond the scope of the patentee's rights. Adams v. Burke, 17 Wall. 453 (21 L. Ed. 700); Bloomer v. Mcquewan, 14 How. 539 (14 L. Ed.532); Mitchell v. Hawley, 16 Wall. 544 (21 L. Ed. 322); Hobbie v. Jennison, 149 U.S. 355 (13 S. Ct. 879, 37 L. Ed. 766); Keeler v. Standard Folding Bed Co., 157 U.S. 659 (15 S. Ct. 738, 39 L. Ed. 848). But the question is a different one which arises when we consider what a patentee who grants a license to one to make and vend the patented article may do in limiting the licensee in the exercise of the right to sell. The patentee may make and grant a license to another to make and use the patented articles, but withhold his right to sell them . The licensee in such a case acquires an interest in the articles made. He owns the material of them and may use them. But if he sells them, he infringes the right of the patentee, and may be held for damages and enjoined. If the patentee goes further, and licenses the selling of the articles, may he limit the selling by limiting the method of sale and the price? We think he may do so, provided the conditions of sale are normally and reasonably adapted to secure pecuniary reward for the patentee's monopoly. One of the valuable elements of the exclusive right of a patentee is to acquire profit by the price at which the article is sold. The higher the price, the greater the profit, unless it is prohibitory. When the patentee licenses another to make and vend, and retains the right to continue to make and vend on his own account, the price at which his licensee will sell will necessarily affect the price at which he can sell his own patented goods. It would seem entirely reasonable that he should say to the licensee, yes, you may make and sell articles under my patent, but not so as to destroy the profit that i wish to obtain by making them and selling them myself. He does not thereby sell outright to the licensee the articles the latter may make and sell, or vest absolute ownership in them. He restricts the property and interest the licensee has in the goods he makes and proposes to sell.
'The very object of these laws is monopoly, and the rule is, with few exceptions, that any conditions which are not in their very nature illegal with regard to this kind of property, imposed by the patentee and agreed to by the licensee for the right to manufacture or use of sell the article, will be upheld by the courts. The fact that the conditions in the contracts keep up the monopoly or fix prices does nor render them illegal.'
'Speaking of the contract, he said (186 U.S.at) p. 93 (22 S. Ct. 756):
'The provision in regard to the price at which the licensee would sell the article manufactured under the license was also an appropriate and reasonable condition. It tended to keep up the price of the implements manufactured and sold, but that was only recognizing the nature of the property dealt in, and providing for its value so far as possible. This the parties were legally entitled to do. The owner of a patented article can, of course, charge such price as he may choose, and the owner of a patent may assign it or sell the right to manufacture and sell the article patented upon the condition that the assignee shall charge a certain amount for such article.'
'The question which the Court had before it in that case came to it on a writ of error to the Court of Appeals of New York, and raised the federal issue whether a contract of license of this kind, having a wide operation in the sales of the harrows, was invalid because a violation of the Anti-Trust law. This Court held that it was not.' (272 U.S.at Pages 489-491, 47 S. Ct.at pages 196, 197, 71 L. Ed. 362)
The Court in the General Electric case held that Bement v. National Harrow Company, 1902, 186 U.S. 70, 22 S. Ct. 747, 46 L. Ed. 1058, had not been overruled by Motion Picture Patents Co. v. Universal Film Co., 1917, 243 U.S. 502, 37 S. Ct. 416, 61 L. Ed. 871, L.R.A.1917E, 1187, AnnCas. 1918A, 959, in which it had held that the owner of a patented machine could not grant a license for its use conditioned upon the use in it of certain unpatented products.
The Court distinguished certain cases in which it had ruled that restrictions as to price of patented articles were invalid ( Boston Store v. American Graphophone Co., 1918, 246 U.S. 8, 38 S. Ct. 257, 62 L. Ed. 551, Ann.Cas. 1918C, 447; Straus v. Victor Talking Machine Co., 1917, 243 U.S. 490, 37 S. Ct. 412, 61 L. Ed. 866, L.R.A. 1917E, 1196, Ann.Cas. 1918A, 955; Bauer & Cie v. O'Donnell, 1913, 229 U.S. 1, 33 S.ct. 616, 57 L. Ed. 1041, 50 L.R.A.,N.S., 1185, Ann.Cas. 1915A, 150; Standard Sanitary Mfg. Co. v. United States, 1912, 226 U.S. 20; Bobbs-Merrill Co. v. Straus, 1908, 210 U.S. 339, 28 S. Ct. 722, 52 L. Ed. 1086), holding that those cases were but 'instances of the application of the principle of Adams v. Burke, 17 Wall. 453, 456 (21 L. Ed. 700) . . . that a patentee may not attach to the article made by him, or with his consent, a condition running with the article in the hands of purchasers, limiting the price at which one who becomes its owner for full consideration shall part with it.' (272 U.S.at Pages 493, 494, 47 S. Ct.at page 198, 71 L. Ed. 362) The Court said that these cases 'do not consider or condemn a restriction put by a patentee upon his licensee as to the prices at which the latter shall sell articles which he makes and only can make legally under the license.' (272 U.S.at page 494, 47 S. Ct.at page 198, 71 L. Ed. 362).
The right of a patent owner to control the terms and conditions including the minimum price under which a licensee may make and sell the patented product as established in the Bement and General Electric cases has not been denied or qualified in later cases. On the contrary, the later cases reaffirm that right. In Carbice Corp. v. American Patents Development Corp., 1931, 283 U.S. 27, 51 S. Ct. 334, 75 L. Ed. 819, holding that a patent licensor cannot exact as a condition of a license that unpatented materials used in connection with the invention (a manufacturer) shall be purchased from the licensor, the Supreme Court nevertheless recognized that a patent owner 'can grant licenses upon terms consistent with the limited scope of the patent monopoly, United States v. General Electric Co., 272 U.S. 476, 489 (47 S. Ct. 192, 71 L. Ed. 362).' (283 U.S.at page 31, 51 S. Ct.at page 335, 75 L. Ed. 819) In General Talking Pictures Corp. v. Western Electric Co., 1938, 304 U.S. 175, 546, 58 S. Ct. 849, 82 L. Ed. 1273, on rehearing 1938, 305 U.S. 124, 59 S. Ct. 116, 83 L. Ed. 81, further rehearing denied 1939, 305 U.S. 675, 59 S. Ct. 355, 83 L. Ed. 437, the Court upheld a license to manufacture amplifiers under the licensee's patent where the license was 'to manufacture. . . , and to sell only for radio amateur reception, radio experimental reception and radio broadcast reception' (305 U.S.at page 126, 59 S. Ct.at page 117, 83 L. Ed. 81), and held that sales by such a licensee for use in the commercial field constituted an infringement, i.e., a violation of the license. In holding that this restriction was valid, the Court said: 'That a restrictive license is legal seems clear. Mitchell v. Hawley, 16 Wall. 544 (21 L. Ed. 322). As was said in United States v. General Electric., 272 U.S. 476, 489 (47 S. Ct. 192, 196, 71 L. Ed. 362), the patentee may grant a license 'upon any condition the performance of which is reasonably within the reward which the patentee by the grant of the patent is entitled to secure.' The restriction here imposed is of that character.' (305 U.S.at page 127, 59 S. Ct.at page 117, 85 L. Ed. 81.) This was upon rehearing. In the opinion written when the case was first heard, the Court said: 'Unquestionably, the owner of a patent may grant licenses to manufacture, use or sell upon conditions no inconsistent with the scope of the monopoly.' (304 U.S.at page 181, 58 S. Ct.at page 852, 82 L. Ed. 1273) In Interstate Circuit v. United States, 1939, 306 U.S. 208, 59 S. Ct. 467, 83 L. Ed. 610, the Court held that certain restrictions in motion picture distributor's licenses to exhibitors exceeded the scope of a copyright monopoly, but, expressly referring to the Bement and General Electric cases, recognized that 'a patentee has power to control the price at which his licensee may sell the patented article . . . .' (306 U.S.at page 228, 59 S. Ct.at page 475, 83 L. Ed. 610) In Ethyl Gasoline Corp. v. United States, 1940, 309 U.S. 436, 60 S. Ct. 618, 84 L. Ed. 852, wherein control of jobber's resale prices was held illegal, a provision in patent licenses whereby licensee refining companies were required to sell the patented product -- Ethyl gasoline -- 'at a certain fixed price differential above the average net sales price of the licensee's best non-premium grade of commercial gasoline' (309 U.S.at page 448, 60 S.ct.at page 621, 84 L. Ed. 852), was not questioned; and the General Electric case was referred to and its principle recognized. In United States v. Masonite Corp., 1942, 316 U.S. 265, 62 S. Ct. 1070, 86 L. Ed. 1461, rehearing denied 1942, 316 U.S. 713, 62 S. Ct. 1302, 86 L. Ed. 1778, the Court disapproved an 'agency' arrangement set up in the 'hardboard' industry, but said that the case did not present 'any question as to the validity of a license to manufacture and sell, since none of the 'agents' exercised its option to acquire such a license from Masonite. Hence we need not reach the problems presented by Bement v. National Harrow Co., 186 U.S. 70 (22 S. Ct. 747, 46 L. Ed. 1058), and that part of the General Electric case which dealt with the license to Westinghouse Company.' (316 U.S.at page 277, 62 S. Ct.at page 1077, 86 L. Ed. 1461) In United States v. Univis Lens Co., 1942, 316 U.S. 241, 62 S. Ct. 1088, 86 L. Ed. 1408, the Court held that fixing the price of a patented article beyond the first sale constituted an improper extension of the scope of the patent monopoly, but said that in this view of the case there was no occasion for reconsideration of the General Electric cas, and the Court in no way rejected the proposition announced by the lower court in United States v. Univis Lens Co., D.C.S.D.N.Y. 1941, 41 F.Supp. 258: 'Nor does the owner of a patent violate the Sherman Anti-Trust Law by fixing prices in license agreements under which articles may be manufactured
and sold by the licensees. United States v. General Electric co., 272 U.S. 476 (47 S. Ct. 192, 71 L. Ed. 362) . . .; E. Bement & Sons v. National Harrow Co., supra . . ..' (41 F.Supp.at page 264) In
Mercoid Corp. v. Mid-Continent Investment Co., 1944, 320 U.S. 661, 64 S. Ct. 268, 88 L. Ed. 376, rehearing denied 1944, 321 U.S. 802, 64 S. Ct. 525, 88 L. Ed. 1089, and Mercoid Copr. v. Minneapolis-Honeywell Regulator Co., 1944, 320 U.S. 680, 64 S. Ct. 278, 88 L. Ed. 396, rehearing denied 1944, 321 U.S. 802, 64 S. Ct. 526, 88 L. Ed. 1089, cases dealing with combination patents covering installed heating systems, which neither the patent owner nor the licensees manufactured or installed, the Court held that the patent monopoly could not be extended to include the imposition of otherwise illegal restrictions on the sale of unpatented stoker switches used in the heating system, but the Court in no way discountenanced the Bement and General Electric cases. The Mercoid cases are referred to again below.
The General Electric case has been stated above in broad outline, and from the facts and questions presented in the case and decision thereon and the language quoted from the opinion, it is seen that the primary propositions for which the case stands are that a patentee may divide his monopoly by licensing the right to make, use and vend the patented product, and that he may fix the terms and conditions, including the price, under which the patented product shall be sold, subject only to the limitation that such terms and conditions do not yield to the patentee more than the normal and reasonable reward of a patent monopoly. Additional propositions for which the case stands, corollary to these primary propositions, will be stated later.
The problem presented in such cases as the General Electric case and the instant case is that of determining whether or not the monopoly accorded to an inventor under the patent laws has been extended beyond its proper operation under those laws and into the field denounced by the Sherman Act. The patent laws and the Sherman Act exist side by side, each being entitled to full recognition and application by the courts.
The nature of a patent monopoly and of the rights thereunder and the relationship of a patent monopoly to the Sherman Act were discussed in an illuminating manner in United States v. Motion Picture Patents Co., D.C.E.D. Pa. 1915, 225 F. 800, appeal dismissed per stipulation of counsel 1918, 247 U.S. 524, 38 S. Ct. 578, 62 L. Ed. 1248, hereinafter referred to as the Motion Picture Patents case. That case was not cited in the General Electric case, but it has been cited, and with approval, more recently by the Supreme Court. Standard Oil Co. v. United States, 1931, 283 U.S. 163, 174, 51 S. Ct. 421, 75 L. Ed. 926; cf. Hartford-Empire Co. v. United States, 1945, 323 U.S. 386, 415, 65 S. Ct. 373, 89 L. Ed. 322, rehearing denied 1945, 324 U.S. 570, 888, 65 S. Ct. 815, 89 L. Ed. 1198. In the Motion Picture Patents case motion picture producers and importers, some of whom had patents upon articles such as positive films, cameras and projecting machines, formed a combination. They created a board to censor films, established exchanges and refused to sell films to operators of theaters who did not belong to the exchanges and who did not pay royalties on their machines to the combination, regardless of when or from whom the machines were purchased. It was attempted to justify the restrictions as a protection of the patent rights of the parties to the combination. The court held that the combination was invalid as a violation of the Sherman Act for the reason that the regulations imposed did not bear a normal relation to the protection of patent rights, but were on the contrary intended to accomplish the imposition upon the trade of undue and unreasonable restraints with the direct result of monopolizing trade in all the accessories of the motion picture art, and the further end, largely achieved, of dominating the motion picture business itself. District Judge Dickinson, who wrote the opinion, pointed out that the right to make, use and vend the subject matter of a patent is the natural right of an inventor and that what the patent law does is to withhold for a limited period of time from all others than the patentee or his assigns, the right to make, use or vend the patented article; he pointed out also that the monopoly recognized by the patent law is not the monopoly condemned by the Sherman Act. He said: 'To hold otherwise would clearly be . . . a logical absurdity, because there can be no such thing as restraint in a trade which has no existence, and a monopoly created by law, in pursuance of a policy of the law, cannot be said to result from such restraint. To transfer a phrase from the opinion of Judge Cochran, in Patterson v. United States (6 Cir., 1915, 222 F. 599, 620, certiorari denied 1915, 238 U.S. 635, 35 S. Ct. 939, 59 L. Ed. 1499), which was directed to something else, but which is applicable here: 'There can be no monopolizing in the legal and accurate sense of the word where there can be no common occupation.' (225 F.at pages 804, 805) Judge Dickinson said also
'We have, therefore, to determine the limits of a right and a wrong which seem to overlap each other. It is the right of a patentee, through having the exclusive sale of the patented article, to control, and in that sense, to monopolize, the trade in it. It is wrong by any illegal restraint of trade to monopolize it, or any part of it. On the one hand, it cannot have been intended to make it unlawful to acquire that the right to which the law has conferred. On the other hand (as already observed), it cannot be that the grant of a patent right confers a license to do that which the law condemns.
'The solution of the problem is to be sought by finding the special field of operation of each of these laws. There is a field of trade, the sole occupancy of which may be in a patentee. Here he is supreme, and the keeper of the gate of entrance. There is another field which is in the common occupancy of all. Where the law has given the whole field to a patentee, with the express right of exclusion of others, and the use of the power of the law to enforce the exclusion, it is unthinkable that such exclusion is an illegal restraint of trade. Where the field, however, is open to all, competition for trade is likened to a race in which all may enter, but in which there must be no unfair jostling or hampering of others. Each one is free to exert all his powers, and distance, if he can, all competitors, and win all the prizes; but he must run fairly and accord to others a like freedom. If he possesses a patented device which will aid him in the race, he may use it, as he may use any other form of property; but he must put it only to its proper use, and if he uses it as a weapon to disable a rival contestant, or to drive him from the field, he cannot justify such use, because of his patent right, except to the extent of protecting his exclusive right. We have, therefore, the principle, which is recognized in all the cases, that if the subject-matter of a contract, which otherwise would be illegal because in restraint of trade, is a patented article, this takes away the illegality only to the extent to which the field of the trade, controlled through the combination, is coextensive with the field within which exclusive control has been granted by the law. This is the doctrine of Henry v. (A. B.) Dick (Co.), 224 U.S. 1, 32 S. Ct. 364, 56 L. Ed. 645, Ann.Cas. 1913 D. 880, Bement (& Sons) v. (National) Harrow Co., 186 U.S. 70, 22 S. Ct. 747, 46 L. Ed. 1058, the Bath Tub Case (Standard Sanitary Mfg. Co. v. United States), 226 U.S. 20, 33 S. Ct. 9, 57 L. Ed. 107, and all the other kindred cases to which we have been referred.
'The difference between this private field and the common field of trade is, as a distinction, sufficiently clear; but there may be again an overlapping. tHe owner of a patented article has the right to enter upon this common field of trade. His patented article may be so superior, or of such less cost than anything else upon the market, as to supplant all others and give to him the whole trade as effectually as if his patented article has originally had the field to itself. Indeed, its ownership may be sought, for the reason that it has this possibility of power. Again, the patent may apply to only certain features of the article of trade, and yet enable the owner to reap the same advantage, and control a trade in what is beyond the exclusive rights given by the patent. The special circumstances affecting a particular contract or combination may make the principle difficult of application, and the line of legality or illegality hard to draw; but the principle remains the same. The legality of such a contract is determined by the judgment of whether, in its whole scope and legal intendment, it is fairly limited in its operation to the proper field of trade belonging to the patentee, and whether any further advantages which flow to him are fairly incidental, and are not the evil fruit of unfair of unfair practices employed to restrain the right of others to a share of the common trade. It is the legal intendment of the contract or combination which is to be found. The motives of the contracting parties, whether innocent or otherwise, do not determine the real character of their act; but it is determined through the judgment of the law. Motives and intentions, except as declared, or appearing from the character of the act, are too vague and difficult of ascertainment to be made the basis of the legal judgment called for in such cases. A conspiracy under this statute, as at common law, may have, as an element, the seeking of an unlawful end or the employment of unlawful means.
'We learn from the opinion in the Keystone Watch Case Co. Case ( United States v. Keystone Watch Cas Co., D.C., 218 F. 502) that the prohibited restraint of trade, beside being undue and unreasonable, must be the direct, and not a merely incidental, result of the contract or combination, before the latter will be condemned as illegal. If it is asked to be condemned, and because of the illegality of the means employed to accomplish its end, but because monopoly results as a consequence, the monopoly must be shown to be an unlawful monopoly. not the monopoly granted by the patent laws. A contract or agreement among business men, which had as its end to preserve to the owners of a patent the exclusive sale of the patented article, and as its means the exercise of due, reasonable, and fairly proper control over sales to be made, would not be condemned as void in itself, or justify any inference of guilt under the act of 1890. Where, however, by what was agreed to be done, the end indicated, in the sense of the result to be expected, was a monopolistic control of what was not the exclusive property of any one, or such a monopoly was the direct result of undue and unreasonable restraints of trade, to be employed as the means of carrying out what was to be done, the fact that anyone or more of the persons concerned owned patents would not prevent a finding of conspiracy.' (225 F.at pages 805-807)
In the Bement, General Electric and Motion Picture Patents cases are found the principles and propositions which must be applied in cases such as the instant case, i.e., in cases where it is charged that patent license agreements and operations thereunder violate the Sherman Act.
The Government, however, urges that the General Electric case and the instant case are distinguishable. It is said first that in the General Electric case the patents completely covered the incandescent lamp, whereas in the instant case they do not completely cover the patented product. Second, it is asserted that in the General Electric case the licensing, so far as price fixing restrictions are concerned, extended only to Westinghouse, a single competitor of General Electric, and that the percentage of manufacturing and sale of patented electric lamps controlled by General Electric and Westinghouse was but 85% of the total business of this type; whereas, in the instant case, the licensing, all of which involved price fixing, extends to six competitors, and the licensor and licensees manufacture and sell 100% of the patented product in the 'Eastern area.' Third, it is contended that in the General Electric case the terms and conditions of the patent license related only to price fixing and were not unduly restrictive, whereas in the instant case the terms and conditions of the licenses go beyond mere price fixing and are unduly restrictive. In order to discuss these contentions, it is necessary somewhat further to detail the facts as shown by the opinion and by the record in the General Electric case. This will serve the purpose also of disclosing the corollary propositions, alluded to above, for which the General Electric case stands. The case was heard in the Supreme Court upon a record (of some 875 printed pages) which included a 'stipulation by counsel for all parties which, together with the exhibits attached thereto and filed therewith, contains all the evidence upon which the case was tried in the District Court, and the said exhibits attached to said stipulation.' (Record, United States v. General Electric Company et al., No. 113, Supreme Court, October Term 1926, at 875. This record is hereinafter for convenience referred to as the G.E. Record.)
In respect of the nature of the patents in the General Electric case and in the instant case: The first incandescent electric lamp was invented in 1880 by Thomas Edison. The original patents for such lamps had expired long before the General Electric-Westinghouse license agreement was executed in 1912. The light giving element in the lamp of 1880 was a carbon filament. In 1904 an improved carbon filament known as 'metallized carbon filament' was invented. Next a tantalum filament lamp was introduced. This reduced the consumption of current substantially as compared with the standard carbon filament lamp, but it was not a satisfactory lamp for use on alternating current. Thereafter a tungsten filament incandescent electric lamp was introduced and was developed to such an extent that it consumed only about one-third of the current consumed by the carbon filament lamp in its best form, and less than one-half of that consumed by the metallized carbon filament lamp, for the production of an equal amount of light. The tungsten filament lamp was therefore superior to those containing carbon filaments or metallized carbon or tantalum filaments. But the patents covering the tungsten filament lamp were not 'basic' in the sense that they covered a fundamentally new and basic invention covering completely an incandescent electric lamp. They were merely for improvements upon the original invention of Edison of 1880. The tungsten filament manufactured under the Just & Hanaman patent of 1912 was brittle and in consequence expensive to manufacture and easily broken in shipment and use. The Coolidge patent of 1913 covered improvements which merely increased the tensile strength and endurance of the tungsten filament. The Langmuir patent of 1916 further improved the incandescent electric lamp by the introduction of gas into the bulb, and this improvement came to be used in many but not all of the tungsten filament lamps made. It thus appears that the Just & Hanaman, Coolidge and Langmuir patents (the three patents specifically mentioned in the opinion of the Court in the General Electric case) covered various features of the incandescent lamp having a tungsten filament, which represented a further development in the incandescent lamp field over the lamps with carbon, metallized, or tantalum filaments. At the time the General Electric-Westinghouse license was executed in 1912 about 50% of the total number of lamps sold were of the ordinary carbon filament type. After nine years of operation under the license, the percentage of tungsten filament lamps increased, because of their superior quality, to some 97% of total production. The General Electric Company occupied a dominant position in the incandescent lamp industry by reason of its patent ownership. It had patents not only on the tungsten filament lamps but also on the carbon and tantalum filament lamps, and the latter were included in the General Electric Electric-Westinghouse license and the licensor reserved the right to fix the price of lamps having metallized carbon or tantalum filaments the same as it did in respect of tungsten filament lamps. The Court in the General Electric case drew no distinction as to General Electric's rights as the owner of patents covering different types of lamps. The step by step progress in electric lamp production was founded upon the original basic work of Edison.
The principal patents upon which the license agreements in the instant case were founded, to wit, the Uzman, Haggerty and Roos patents, typical claims of which have been set out in the statement of facts at the outset of this opinion, were product patents upon a building material called plasterboard or wallboard. The Patents, as will be noted from the claims, were upon the entire product, not merely upon the edge of the board in the Utzman patent, or upon the starch in the Haggerty patent, or upon the bubbles or air cells in the Roos patents. As appears in the statement of facts, these patents covered important developments in the gypsum board manufacturing industry. The open-edge board which preceded the closed-edge board of the Utzman patent had defects in that there was in its manufacturing wastage due to the necessary trimming of the board edge, the edge was weaker, and the core would sift out in handling and nailing. When the closed-edge board of the Utzman patent came into the market and the open-edge board was largely displaced under the demand of the trade for the better product. The Haggerty patent, directed to the employment of starch or a cooked carbohydrate in the core of the board to insure a good bond between the core and the paper covering sheets, solved the 'peeler' trouble in the gypsum board industry, and made possible the modern high speed production of gypsum board. The Roos patents, covering cellular core gypsum board produced by the employment of foam or a foaming agent in the core to produce innumerable cells or voids, thereby lightening the board and lending desirable nailing and other qualities thereto, supplanted the sawdust theretofore a necessary 'aggregate' used in the core. Sawdust had become difficult to obtain and was moreover unsatisfactory as an 'aggregate' because of variation in quality and character, which produced manufacturing difficulties. The use of the foam of the Roos patents solved these difficulties and produced a superior product with reduced manufacturing costs. Thus while the gypsum board manufacturing industry and the electric lamp industry deal with different materials, both nevertheless important to the occupants of modern houses and buildings, there is a parallel between the development of the two industries in the step by step improvements in an important product -- gypsum board as a building material and the incandescent electric lamp as a lighting medium.
The patents in the instant case and those in the General Electric case are distinguishable from those involved in Mercoid Corp. v. Mid-Continent Investment Co., supra, and Mercoid Corp. v Minneapolis-Honeywell Regulator Co., supra. Those cases dealt with combination or 'system' patents covering a domestic heating system comprising three main elements -- a motor driven stoker for feeding fuel to the combustion chamber of a furnace, a room thermostat for controlling the feeding of fuel, and a combustion stoker switch to prevent extinguishment of the fire. The patents were upon the combination, not upon these constituent devices. Such patents are not comparable to a product patent, which covers the whole product, although no patent has been granted upon the constituent materials. The unpatented glass and metal base in an electric lamp and the unpatented calcined gypsum rock and paper in plasterboard are not to be compared with an unpatented constituent device in a combination patent.
In respect of the comparative number of (price fixing) licenses and the extent of manufacture and sale of the patented product in the General Electric case and the instant case: No material distinction can be drawn between the two cases because in the former there was but on (price fixing) competitor licensee whereas in the latter there are six. As appears from the opinions in the General Electric and Bement cases, the owner of a product patent may manufacture and sell the article himself alone if he sees fit and at such price as he may choose. Or he may 'sell the right to manufacture and sell the article patented upon the condition that the assignee shall charge a certain amount for such article.' (272 U.S.at page 491, 47 S. Ct.at page 197, 71 L. Ed. 362, quoting from 186 U.S.at page 93, 22 S. Ct.at page 756, 46 L. Ed. 1058) In short the owner of a product patent may either exercise the monopoly thereof exclusively himself or he may divide its exercise. In the General Electric and Bement cases nothing indicates that the division of a patent monopoly is limited to the patentee and a single licensee. It can make no difference so far as the Sherman Act is concerned whether the patentee licenses no one, or licenses one, two, three, four, five, or six or a dozen, others. Putting this otherwise, if the patent laws, despite the Sherman Act, do not legitimatize a monopoly in the manufacture and sale of a patented product by a patentee-licensor and one licensee or by the patentee alone, because in each instance the exclusion of the public from manufacture, use or sale within the field marked out by the patent is exactly the same, i.e., complete. Once it is recognized that a patentee may divide his monopoly, no limit can reasonably be put upon the number of persons he may see fit to license, provided always the terms and conditions of the licenses do not go beyond those which normally and reasonably secure the rewards of a patent monopoly. If in the General Electric case the Court had held that the patent laws do not permit any division of his monopoly by a patentee and had therefore stricken down the Westinghouse license (and the additional nonprice fixing licenses), General Electric itself would then have been in control of all of the manufacturing, using and selling of the electric lamps covered by the patents. Although but one price fixing license happened to be involved in the General Electric case, it would be an irrational fixation to construe the decision of the Court as limiting licensing under price fixing restrictions to one competitor, since the public is equally excluded and equally subjected to the patentee's price whether there is no licensee, one licensee or many. Cf. United States v. Line Material Company, D.C.E.D. Wis. 1946, 64 F.Supp. 970; Laurence I. Wood, Patents and Antitrust Law (C.C.H. 1942) 182-3.
No distinction, moreover, can be drawn between the General Electric case and the instant case because the percentage of manufacturing and sale of patented electric lamps controlled by General Electric and Westinghouse, the single price fixing licensee, was but 85% of the total lamp business, whereas in the instant case USG and its six competitor licensees manufacture and sell substantially all of the gypsum board in the 'Eastern area.' It is not possible to conclude that the General Electric case would have been differently decided if 100% of the trade in electric lamps had been within the control of the General Electric and Westinghouse companies. It is not necessary for violation of the Sherman Act that a restraint of trade shall be complete; it is sufficient if it is substantial. Paramount Famous Lasky Corp. v. United States, 1930, 282 U.S. 30, 51 S. Ct. 42, 75 L. Ed.145; Fashion Originator's Guild v. Federal Trade Commission, 1941, 312 U.S. 457, 668, 61 S. Ct. 703, 85 L. Ed. 949. The control of the electric lamp industry under the General Electric-Westinghouse license was substantial. The control was recognized as legitimate not because it was limited to 85%, so far as price fixing restrictions were concerned, but because it was by virtue of a patent, and under license terms and conditions which the Supreme Court thought were normally and reasonably adapted to securing the reward which the General Electric Company as patentee was by the grant of the patent entitled to secure. Indeed, the Court expressly recognized in the General Electric case that a patentee is entitled to a complete monopoly. It said:
'But it is said that the system of distribution is so complicated and involves such a very large number of agents, distributed throughout the entire country, that the very size and comprehensiveness of the scheme brings it within the Anti-Trust Law. We do not question that in a suit under the Anti-Trust Act the circumstance that the combination effected secures domination of so large a part of the business affected as to control prices is usually most important in proof of a monopoly violating the Act. But under the patent law the patentee is given by statute a monopoly of making, using and selling the patented article. The extent of his monopoly in the articles sold and in the territory of the United States where sold is not limited in the grant of his patent, and the comprehensiveness of his control of the business in the sale of the patented article is not necessarily an indication of illegality of his method. . . .' (272 U.S.at page 485, 47 S. Ct.at page 195, 71 L. Ed. 362)
While it is not necessary to rest the conclusions above reached upon the following, it is of interest to note that it appears from the opinion of the Court in the General Electric case that in the year 1921 the relative percentages of business done by the companies in the electric lamp industry were: General Electric 69%, Westinghouse 16%, other licensees 8%, manufacturers not licensed 7%. While there were no price restrictions in the licenses of the other licensees, comprising 8%, the licenses granted by General Electric to Westinghouse and the other licensees contemplated a prorating of business between the licensor and all of its licensees and also included type restrictions. The stipulation of facts discloses that 'the amount of lamps licensed to be sold . . . is limited by the terms of each of such licenses.' (G.E. Record, supra, at page 92) Westinghouse was given a larger percentage (15% at first, later increased to 17.25%).
As to the restriction in respect of types of lamps, at the time the General Electric-Westinghouse license was executed General Electric wrote Westinghouse concerning the other licensees, or some of them
'. . . it is understood that the arrangement with the Western Electric Company referred to will relate solely to lamps sold under the 'sunbeam' trademark.
'Also that the arrangement with the American Ever Ready Company referred to will relate solely to lamps of the miniature and decorative types.
'It is also understood that the General Electric Company will not sell lamps of its manufacture to either the Aetna, Capital, Liberty or Gilmore Company in excess of quantities which, added to the quantities manufactured by such Licensees, respectively, will equal the aggregate quantities which such Licensees are respectively licensed to manufacture under such licenses as may be granted to them respectively superseding the license dated April 1st, 1909.
'Our understanding is that the acceptance of the Westinghouse Company of the License of March 1st, 1912, is conditional upon the foregoing.' (G.E. Record at page 113)
Absent the legitimization of a patent, a restriction upon the quantity of a product sold in interstate commerce is a violation of the Sherman Act. American Equipment Co. v. Tuthill Bldg. Material Co., 7 Cir., 1934, 69 F.2d 406.
A restriction upon type of product would seem equally to be a violation, in the absence of a legitimatizing patent
From the foregoing it appears that the restrictive provisions in the General Electric licenses involved 93% of the industry, with actual price fixing provisions applicable to 85%. It is true that the opinion, so far as the second question therein involved is concerned, discusses only the legality of the Westinghouse license from General Electric in which the latter company imposed the condition that Westinghouse sales should be at prices fixed by General Electric and subject to change according to its discretion. But it is not to be assumed that the decision of the Court was not reached in the light of the facts shown by the record with reference to the terms of all of the licenses.
In respect of the terms and conditions of the license agreements and price bulletins in the instant case, as compared with the terms and conditions, including price provisions, of the General Electric-Westinghouse license: The terms and conditions of the license agreements and price bulletins in the instant case have been stated at the outset of this opinion; it is not necessary to restate them here. The provisions of the General Electric-Westinghouse license ar summarized in the margin.
Comparison of the provisions in the two cases discloses no material distinction. In both cases the licenses were non-exclusive; there was to be no contest of the validity of the licensor's patents; there were provisions for royalties, records and reports. In both cases the licenses were granted upon the condition that the licensor should have the right to fix the minimum prices at which the licensee should sell the patented product, the prices to be charged by the licensor and licensee to be the same. In both cases, in respect of prices, there were two classes of provisions, one class providing how price should be arrived at, the other intended to protect the price fixed, i.e., to prevent indirect price cutting. In both cases the provisions for arriving at price were drafted in view of the fact that the ultimate price at which a product is to be sold cannot be arrived at merely by naming an amount, but that other factors which have economic relationship to price -- such as terms of payment, cost of delivery to various areas, including freight charges, quantity sold, type of product sold, and the like, must also be stipulated. It was recognized by the Court in the General Electric case that terms of payment and delivery affect price.
The provisions in the General Electric-Westinghouse license and in the licenses in the instant case in respect of indirect price cutting, i.e., the price protective provisions, including those which relate to commission salesmen, are of similar character. This is commented upon further in footnote 25. If there is any difference between the provisions of the licenses in the General Electric case and in the instant case, it is in the greater stringency and complexity of those in the former
The foregoing comparison of the patents involved in the General Electric case and in the instant case and of their relation to the respective industries, and the comparison of the amount of trade controlled by the parties to the license agreements in each of the two cases, and of the terms and conditions of the license agreements, and the conclusion reached above that no material distinction exists between the two cases, require that the question stated at the outset of this topic II be answered in the affirmative. That is to say, the license agreements described in the statement of facts at the outset of this opinion, examined in the light of the nature of the principal patents upon which they were founded, in the light of the fact that the defendants make and sell substantially all of the gypsum board in the 'Eastern area,' and in the light of the terms and conditions of the agreements, including those relating to price, are lawful. The decision in the General Electric case must be taken as sanctioning division of a patent monopoly by the granting of one or more licenses based on improvement patents, of control by a patentee through licenses of the price of either a major portion or all of a product made and sold in an industry, and of such stringent terms and conditions of patent licenses, including both price fixing and price protective provisions, as are shown by the record in that case. Since the facts in the instant case are substantially parallel to those in the General Electric case in the respects mentioned, the license agreements in the instant case must be considered valid.
It is stated in the stipulation of facts in the record in the General Electric case that Westinghouse in negotiating its license dealt with General Electric 'at arm's length,' and it is suggested by the Government that on that account the two cases are distinguishable.
If by the suggested distinction the Government means to imply that there was coercion by USG in obtaining execution of the license agreements in the instant case, it is to be answered that there is no charge of coercion in the complaint and that the suggestion is therefore irrelevant to any issue defined by the pleadings. If by the suggestion is meant that the license agreements in the instant case were not executed in good faith, that is an issue which is discussed below
It was said above that in addition to the primary propositions for which the General Electric case stand (that a patentee may divide his monopoly by licensing the right to make, use and vend the patented product, and that he may fix the terms and conditions, including the price, under which the patented product may be sold by the licensee, subject only to the limitation that such terms and conditions do not yield to the patentee more than the normal reward of a patent monopoly), the decision stands for certain further propositions, corollary to its primary holdings. These corollary propositions appear as follows:
The General Electric case demonstrably involves on its facts negotiation and discussion resulting in a 'contract in restraint of trade,' a 'combination and conspiracy in restraint of trade,' a 'monopoly,' 'price stabilization,' substantial elimination of manufacture and sale of inferior materials, i.e., 'standardization,' and elimination of an element (jobbers) in the distributive system, i.e., 'control of distribution.' All of this, except for the legitimatizing patents upon which the General Electric-Westinghouse license agreement was founded, except for the fact that the terms and conditions of the license did not, in the view of the Supreme Court, yield to General Electric more than the normal reward of its patent monopoly, and except for the fact that the price stabilization, standardization of materials, and control of distribution were but the normal and incidental fruits of a patent monopoly and licensing thereunder, would have been a violation of the Sherman Act. As a matter of course the complicated General Electric-Westinghouse license was not entered into without preliminary negotiation and discussion. This is shown in footnote 27, and further in the following from the stipulation of facts:
'At the time of the aforesaid decree the General Electric Company was the owner of the patent rights relating to the tungsten filament lamp, upon which applications had then been filed and under which the above mentioned Just & Hanaman patent No. 1018502 and Coolidge patent No. 1082933 were subsequently issued. Because of the superiority of the tungsten filament over the carbon filament, the exclusive right to make, use and vend lamps manufactured with tungsten filaments under the aforesaid patents, if valid and lawfully acquired by the General Electric Company, and of the scope indicated by their claims, vested in their owner, the General Electric Company, what has since become a practical monopoly of the manufacture and sale of incandescent electric lamps. The Westinghouse Electric & Manufacturing Company because of this situation entered into negotiations with the General Electric Company, for a license to manufacture under said patents, which negotiations resulted in the arrangement now in existence, as set forth in the above mentioned agreement, dated March 1, 1912, between the Westinghouse Electric & Manufacturing Company and the General Electric Company. . . . ' (G.E. Record, supra, at page 104)
The record in the General Electric case also shows that General Electric, in entering into the license agreement with Westinghouse, discussed with Westinghouse the terms of the licenses with the other licensees. This appears from that portion of the record above quoted as demonstrating quantity and type limitations upon the other licensees. The license agreement between Westinghouse and General Electric was, of course, a 'contract.' In performing the obligations of the license agreement, Westinghouse and General Electric constituted a 'combination and conspiracy' as did General Electric and each of the other licensees in performing the obligations of the several other licenses which, although they did not subject the other licensees to price control, did impose quantity and type limitations upon them. The General Electric-Westinghouse license controlled a sufficient amount of trade in electric lamps, 85%, to constitute a 'monopoly' which, in the absence of a patent, would have been a violation of the Sherman Act. Since General Electric and Westinghouse were both to sell the patented product at the same price, there was 'price stabilization' as between them, and hence in the electric lamp industry, since they controlled 85% of it; and the price was set, presumably, at a profitable level. The increase in tungsten filament lamps to 97% of total production, because of their superior quality, with the consequent substantial elimination of sale of lamps of the ordinary carbon filament type, accomplished 'standardization' of the patented product. The arrangements for selling direct to consumers with consequent elimination of jobbers under the General Electric agency distribution plan adopted by Westinghouse constituted 'control of distribution.'
Finally, it is obvious in the General Electric case that the very purpose of the negotiation, discussion, execution of the license, and conducting of operations thereunder, was, on the part of the General Electric Company, that of exploiting its patent monopoly through collection of royalties, and at the same time, by means of price control, protecting its own profit in the making and selling of the tungsten filament lamps; and, on the part of Westinghouse, that of acquiring the right to make, use and sell the superior patented article and thereby making profit. And both must have expected, since both were to sell at the same price, that this 'price stabilization' between them would cause stabilization in the industry; and both must have hoped and expected that their making and sale of the superior lamps would lessen the making and selling of inferior products by them and by others; and both clearly purposed the 'control of distribution' through the elimination of jobbers. Yet the Supreme Court regarded none of this, in either purpose or accomplishment, as illegal. It looked upon the negotiation, discussion, license agreement and operations thereunder as the accomplishment of a lawful end by lawful means.
It follows from the foregoing that the terms 'contract in restraint of trade,' 'combination and conspiracy,' 'monopoly,' 'price fixing,' 'price stabilization,' 'standardization,' and 'control of distribution' do no necessarily carry an illegal connotation. Confusion is avoided if this is borne in mind. Showing without more, in a case brought under the Sherman Act, but involving a patent license, that there have been relationships, operations and accomplishments, which, grossly, are within the terms quoted, is not enough. The question in such a case is not merely whether there has been a 'contract,' a 'combination,' a 'monopoly,' 'price fixing,' 'price stabilization,' 'standardization,' 'control of distribution,' and a purpose to accomplish and a partnership in accomplishing such actual restraints of trade -- for the patent laws, within their limits, permit all of the foregoing; the question in such a case is whether the purposes and accomplishments of the parties to the license contract went beyond the lawful limits of a patent monopoly and into the field of purposes and acts denounced by the Sherman Act. Were the 'restraints of trade' illegal, i.e., of Sherman Act quality and extent, or were they such as the patent laws permit -- is the question.
The General Electric case illustrates that the law, whether in the form of a statute, or of principles arising out of judicial application of a statute (in this instance the statute authorizing the granting of patents and the principles arising out of judicial application thereof to patent licensing arrangements and operations) cannot legitimatize such arrangements and operations and at the same time stigmatize as unlawful the purpose to bring them about, the necessary means of bringing them about and carrying them on, or the consequences that normally flow from them. The General Electric case establishes that a patent license agreement granting the right to make, use and vend a patented product, under terms and conditions, including prices, fixed by the licensor, is lawful. Such a license agreement ordinarily, and, when the prices are (as in the General Electric case) a part of the license contract, necessarily, involves negotiation and discussion between the licensor and the licensee and agreement upon the terms and conditions, a purpose to execute and carry out the agreement, combined action in signing the agreement and in performing the obligations thereof, with knowledge that it will result in a stabilized and presumably profitable price for the patented product as between the parties and in the industry (since the parties are, by virtue of the patent, the only ones having a right to make, use and sell the superior patented product) and with knowledge that it will result in a monopoly (i.e., a divided patent monopoly), in probable discontinuance of manufacture and sale by the licensee of inferior materials (the licensee's incentive to take a license is the right to make the superior product), and in control of distribution. What a lawful patent license agreement normally involves cannot be unlawful. Additionally, since a patent owner may lawfully divide his patent monopoly with a plurality of licensees, there will in the usual course be with each of such licensees the same negotiation and discussion, agreement upon terms, purpose to execute and carry out a license contract and to accomplish its normal results, and combined action in so doing, as in the case of a single licensee. And each licensee will be informed of and discuss with the licensor the terms and conditions of the proposed licenses; otherwise no more than a single license would be executed. A patent owner would not be able to license competing manufacturers upon different price terms; no one such would be willing to suffer competitive disadvantages; no one such would be willing to sign in the dark as to the terms to be extended to the others; ordinarily, moreover, there will be discussion at large, i.e., within the trade, of the advantages and disadvantages of the licenses proposed by the patent owner. Each of a plurality of licensees will, moreover, have the same purpose to take a license and to secure its resulting advantages. The licensor and each licensee of such a plurality constitute a 'combination' to effectuate the purposes of their license. Since a plurality of licenses is lawful, all of this must be lawful. Further if in practical effect the licensor and the plurality of licensees are a 'combination' to the same end, such a 'combination' is not stigmatized by the law -- provided in purpose and effect it does not secure to the patent owner more than the normal reward of a patent monopoly, nor to any of the licensees with whom that monopoly is divided more than the advantages which naturally result to a licensee, as well as to a licensor, from patent licensing. All of this necessarily follows from the General Electric case. Compare the words of the court quoted from the Motion Picture Patents case, supra.
In the course of the oral arguments upon the motions now under consideration in the instant case, the presiding judge put to the Government the following questions:
'Justice Stephens: Since your argument is being interrupted by these questions and since you are going to discuss the General Electric case in greater detail, I should like to put to you . . . some problems which arise in my mind on what seems to be your opinion, from the briefs and your statement this morning, with respect to the General Electric case, not with the expectation you will answer them now but so that you can think them over and answer them later.
'I have read the General Electric case very carefully and given considerable thought to your position as announced in your briefs that it really is not a case which controls the instant case. My thinking takes me back first, on the subject of the General Electric case, to what is the nature of a patent or of a so-called patent monopoly. It is not, as I understand it, quite like a monopoly such as the Government gives to one to whom it grants Blackacre-which the Government, as the representative of the people, originally owned entire and now passes over upon some consideration to a grantee in perpetuity or in fee simple. It is not that kind of monopoly because the Government never did have the process or product or design or machine which becomes the subject of a patent. The invention was originally in the mind of the inventor. What the Government gives him, what we call a patent monopoly, is an exclusive right to make, use and vend over a period of years and the theory of that is, as I have always understood it, that that will be an inducement to him to disclose the results of his inventive activity to the public for the benefit of the public and to the development of industry.
'As I understand the theory of the General Electric case, since a patentee does have an exclusive right to make, use and vend over a period of time, he may make a choice between keeping that himself, keeping his patent monopoly exclusively in him over the period of the patent and licensing the right to make, use and vend to someone else and he may, under the theory of the General Electric case, fix reasonable terms and conditions, including prices, on the first sale by his licensee, in protection of his patent monopoly.
'Let's assume for the moment that the General Electric case means that he can only have one licensee. He cannot enter into an agreement with that licensee without discussion of terms and conditions and prices; so that far, at least, the discussion cannot be illegal. The getting together of the parties cannot be said to be the kind of a conspiracy which is illegal under the Sherman Act because the Sherman Act and the patent laws stand together.
'I have difficulty in seeing, taking the next step, how it can be said that the General Electric case confines a patentee to licensing one licensee -- because what difference can it make, if he has a right to retain the whole patent monopoly in himself if he wishes to, whether he divides it with one or divides it with ten or with a hundred? It is still a patent monopoly. The public is excluded except to the extent that he gives it the benefit of the invention by using it himself or by dividing it with licensees. If it then follows from the General Electric case that a patentee can have more than one licensee, again how can it be illegal for the group of licensees or the several licensees to discuss either with him or with each other the terms of the license arrangements? In short, how can the law both give and take away with the same hand? It gives the right to enter into either one or a group of patent-license agreements. Does it not necessarily also give the right to do the things that are normally necessary to constitute such agreements-talk about them and discuss the terms? Must a patentee go by stealth and by night to each licensee separately to make out the license agreement and avoid any discussion with the group?
These questions were not satisfactorily answered by the Government either in the course of the further oral argument or in the written briefs submitted on the motions.
The principles and propositions stated and the conclusions reached in this topic II leave for determination two issues of fact. There is no dispute about the nature of the principal patents upon which the license agreements were founded, or about the extent of manufacture and sale by the defendants of gypsum board in the 'Eastern area,' or about the signing of the agreements, or about the terms and conditions thereof, including those for the establishment and protection of minimum prices on patented board made and sold by the defendants. It has been determined that the license agreements, looked at in the light of the nature of the patents, of the fact that the defendants make and sell substantially all of the gypsum board in the 'Eastern area,' and in the light of the terms and conditions of the agreements, are lawful. But it has been assumed in this topic that the license agreements are bona fide agreements; whereas it is charged by the Government that they are not such but are sham and were entered into for illegal purposes. It has also been assumed in this topic that the agreements were carried out according to their terms, which have been held valid; whereas it is charged that the operations of the defendants actually went beyond the proper limits of a patent monopoly and licensing thereunder.
These two questions of fact are therefore left for decision: One, were the license agreements not entered into as bona fide agreements, but merely to give color of legality to a combination to restrain trade in violation of the Sherman Act; the other, were the actual operations of the defendants carried beyond the proper limits of a patent monopoly and licensing thereunder, i.e., beyond the activities contemplated by the agreements as written and into the field denounced by the Sherman Act. But before determination of these two issues of fact can be made, a question relating to the burden of proof must be answered, comment must be made upon certain pertinent principles of proof, and the rule concerning the admissibility of declarations of alleged co-conspirators must be stated. And, preliminary to consideration of the two issues of fact, there must be determined, under the motions to strike declarations admitted in evidence subject to connection, whether there is evidence outside the declarations of the existence of the conspiracy charged and of the defendant's participation therein.
THE BURDEN OF PROOF; PRINCIPLES OF PROOF; THE RULE CONCERNING ADMISSIBILITY OF DECLARATIONS OF ALLEGED CO-CONSPIRATORS
The burden of proof: As has been stated at the outset of this opinion, the Government's complaint in paragraph 44 charges, in the language of the statute, violations of Sections 1, 2 and 3 of the Sherman Act; and in paragraph 45 these charges are amplified by allegations that the defendants have combined to fix arbitrary and non-competitive prices for the sale of gypsum products both patented and unpatented, to standardize the products which they manufactured, to control distribution of such products , and to require manufacturing distributors, upon resale of products purchased from the defendants, to conform to arbitrary and non-competitive prices. The complaint then alleges in paragraph 46 that the combination was entered into and carried out by the defendant in part under the guise of license agreements purporting to relate to the use of patents owned by the defendant USG in the manufacture of gypsum board; that to give color of legality to the combination, the defendant companies and other companies agreed among themselves to enter into, and did enter into, these license agreements; that such agreements are not bona fide patent license agreements reasonably designed to secure to USG the pecuniary reward for valid patent monopolies, but were entered into and executed for the illegal purposes described in paragraphs 44 and 45 of the complaint. Paragraphs 44, 45 and 46 of the complaint are set out verbatim in the description of the charges at the outset of this opinion.
The defendants USG, Avery and Knode, in paragraph 35 of their answer, respond to paragraph 46 of the complaint by denying each and all of the averments thereof. Then, 'further answering,' they aver that USG developed improvements in the manufacture of gypsum products and that it owns numerous patents covering its inventions; that it acquired a legal monopoly in the manufacture, use and sale of products embodying the inventions of its patents, and that it determined to share that monopoly and to grant licenses to the end that the gypsum industry and the public might benefit; and that as a condition in said licenses, USG reserved the right to establish minimum prices. The right so reserved to USG was, so it is further averred, designed to and did protect its patent rights and was a lawful restriction under the patent laws and the decisions of the Supreme Court; the license agreements, it is alleged, involved basic patents and were in law and in fact bona fide agreements reasonably designed to secure to USG the pecuniary reward for its valid patent monopolies to which it was entitled. The full text of this paragraph 35 of the answer of USG, Avery and Knode is set forth in the margin.
The answers of National and Baker, of Ebsary and Fred Ebsary, and of Newark and Tomkins deny the allegations of paragraph 46 of the complaint. The defendants Certain-teed and Hartley deny the allegations of paragraph 46, except that these defendants admit that the licenses referred to in paragraphs 76, 85, 113 and 117 of the complaint were executed between USG and Certain-teed;
they deny that the license agreements were made for any purpose described in paragraphs 44, 45 and 46 of the complaint, and aver that each agreement was voluntarily made for the lawful purpose of enabling Certain-teed to make, sell and distribute gypsum products covered by USG patents. The defendants Celotex and Dahlberg deny the allegations of paragraph 46 of the complaint; further answering, these defendants aver that Celotex was organized in 1935 and did not until 1937 engage in the gypsum business directly or indirectly, that in 1937 and 1938 it acquired a minority stock interest in Certain-teed, and thereafter began selling gypsum products manufactured in plants of Certain-teed, that in 1939 Celotex acquired the assets of American, including the license agreement between USG and American, and that upon advice of counsel Celotex assumed the obligations of that license agreement and has ever since observed its terms. Texas denies the allegations of paragraph 46 of the complaint; further answering Texas alleges that it made license agreements with USG in good faith and in the belief that USG had basic patents, that all of the agreements were made in due course of business and for legal purposes, and in order to permit Texas to make gypsum products, and that, relying upon the validity of the patents and the legality of the agreements, Texas expended large sums in plant equipment
It is the contention of the Government that in this state of the pleadings the burden is upon the defendants by way of confession and avoidance, to justify under the patent licenses the restraints of trade described in the complaint. The Government relies, in this contention, so far as the effect of the pleadings is concerned, upon the Motion Picture Patents case, stated in another connection in topic II of this opinion; and, so far as the bearing of the substantive law is concerned, upon the Masonite case, also referred to in topic II, United States v. Socony-Vacuum Oil Co., 1940, 310 U.S. 150, 60 S. Ct. 811, 84 L. Ed. 1129, rehearing denied 1940, 310 U.S. 658, 60 S. Ct. 1091, 84 L. Ed. 1421, and United States v. Bausch & Lomb Optical Co., 1944, 321 U.S. 707, 64 S. Ct. 805, 88 L. Ed. 1024. The defendants assert that the burden of proving lack of bona fides in the license agreements is upon the Government.
The foregoing is, however, for the purpose of consideration of the contentions concerning burden of proof, an insufficient description of the pleadings of the Government in respect of the patent license agreements. Not only has the Government in paragraph 46 of the complaint set up the execution of such agreements and charged them not to be bona fide, but also in subsequent paragraphs of the complaint it has in detail alleged the circumstances leading up to the execution of the license agreements, and has set forth in detail the manner in which it claims that they were carried beyond the normal limits of a patent monopoly. These allegations have been outlined at the outset of this opinion. Particular reference may here be made, however, to the following paragraphs of the complaint: Paragraph 77 charges that at the time of the execution of the May 1929 licenses USG and its licensees, among other things, mutually agreed that they would immediately discontinue the manufacture of unpatented open-edge board and dispose of inventories of the same at prices to be fixed by USG, agreed that USG would immediately furnish and stabilize prices for board, agreed that as prices for board were raised all companies would increase their prices for plaster and miscellaneous gypsum products, and agreed that the prices for board manufactured by the licensees would be controlled, through the use of other patents, by USG after the expiration of the Utzman patent in August 1929. Paragraph 86 alleges that for many years prior to 1929 the licensees, except Ebsary and Kelley, had been using adhesives in the manufacture of board to increase adhesion between the core and liners, that the licensees, in addition to the agreements contained in the licenses of November 1929, mutually agreed among themselves and with USG to consider such use of adhesives as falling within the scope of the Hite and Haggerty patents for the purpose of permitting price control by USG during the life of said patents; and that Ebsary and Kelley agreed to commence using adhesives for the same purpose. Paragraph 93 alleges that USG and its licensees have by concerted action sought to standardize the manufacture of gypsum board and have refrained from manufacturing and marketing open-edge board and other board not within the agreed upon scope of the patents involved in the license agreements, and that National was induced, by USG and the other licensees, in 1934 and 1935, to refrain from marketing a new light weight board until the other licensees were equipped to make and market a similar board. Paragraph 95 alleges that USG and its licensees, for the purpose of eliminating distribution of gypsum products through jobbers, agreed among themselves to sell gypsum board to jobbers at no less than the minimum prices set by USG for sale of board to dealers and to sell plaster and miscellaneous gypsum products to jobbers at no less than the prevailing minimum prices to dealers for such products, and that this agreement was carried into effect. Paragraphs 96-102 charge that the licenses were used to fix the price of unpatented board in that prices were fixed on unpatented open-edge board, on closed-edge board manufactured and sold during the period from August 6 to November 5, 1929, when USG owned no patents covering such board, that prices were fixed under the Haggerty and Hite starch patents from November 1929 to October 1935, although none of the licensees, except Universal, was manufacturing board under those patents, and that prices were fixed after October 1935 under the Roos foam patents notwithstanding that a substantial part of the board produced by various of the licensees was not covered by the patents issued upon the foam process. Paragraph 103 asserts that beginning in May 1929 USG and its licensees concertedly raised and stabilized the prices of plaster and miscellaneous gypsum products and agreed to sell, and have sold, such products on the basis of various of the terms and conditions prescribed by USG for the sale of gypsum board. Paragraph 108 alleges that since 1929 USG and its licensees have by concerted action induced and coerced manufacturing distributors purchasing gypsum board from them to resell such board to dealers and consumers at bulletin prices determined and fixed by USG for sales of board by its licensees to such trade. All of these paragraphs of the complaint are in aid of the allegations of paragraph 46 as well as of paragraphs 44 and 45.
In this condition of the pleadings, it would be extraordinary to place the burden of proof in respect of the bona fides of, and the propriety of operations under, the patent license agreements upon the defendants, in the absence of some clear requirement of adjective or substantive law. To place the burden as urged by the Government would be, in effect, to strip the Government's complaint of all of its allegations in respect of the patent license agreements, to eliminate from the complaint paragraph 46, and the other paragraphs which supplement the same, alleging the execution and the manner of applying the license agreements. All of these allegations would thus be treated as surplusage and the Government's case would be left resting in the large upon the contents of paragraphs 44 and 45. Where the Government has pitched its case as carefully and elaborately as it has upon violation of the Sherman Act through the execution of patent license agreements not bona fide, and not designed to secure to USG the pecuniary reward for valid patent monopolies, but executed only for illegal purposes, and where the Government has set forth in such detail as it has the manner of accomplishment, through misuse of patent license agreements, of these illegal purposes, it ought to be required to prove the case it has thus alleged unless, as said, there is some clear rule of adjective or substantive law which relieves it of this burden.
None of the cases relied upon by the Government, Motion Picture Patenst, Masonite, Socony-Vacuum and Bausch & Lomb, supports its contention concerning the burden of proof on the issue in question. In the Motion Picture Patents case the court introduced its discussion of the effect of the patents there involved by saying: 'The next branch of the defense which presents itself for analysis and discussion is that based upon the patent rights of the Motion Picture Patents Company. The plea, is, in legal effect and in practical acknowledgment, one in confession and avoidance, for there is, as already stated, a substantial (although not formal) admission that, with this patent right ownership out of the case, plaintiff should have the relief prayed.' (225 F.at page 803) But the pleadings are not set out in the opinion of the court; therefore, it cannot be determined whether or not the complaint, as in the instant case, charged that the restraints of trade alleged were accomplished through the misuse of patent license agreements. For all that appears on the face of the opinion, there may have been no mention of patents in the complaint; the defendants may without contest have assumed the burden of justifying their acts under patents. It does not appear that any question was raised as to the burden of proof in respect of patent rights. The case is, therefore, inconclusive. There is, moreover, conclusive authority to the contrary: Where an indictment under the Sherman Act charges a conspiracy in restraint of trade, and monopolization, by a company, its officers and agents, and alleges patents covering products manufactured and sold. The indictment must also negative that the trade and commerce was covered by the patents. Patterson v. United States, 6 Cir., 1915, 222 F. 599, certiorari denied ...