AMERICAN STERILIZER CO. v. SYBRON CORP. Nos. 75-1305, 75-1306.
526 F.2d 542 (1975)
AMERICAN STERILIZER COMPANY, Appellant in No. 75-1305, v. SYBRON CORPORATION and CASTLE COMPANY, a Division of Sybron Corporation, Appellants in No. 75-1306.
United States Court of Appeals, Third Circuit.
Decided November 7, 1975.
John F. Potter, Erie, Pa., Paul T. O'Neil, Raymond N. Baker, Washington, D.C., for American Sterilizer Co.; Thomas R. Boland, Shanley, O'Neil & Baker, Washington, D.C., MacDonald, Illig, Jones & Britton, Erie, Pa., of counsel.
John G. Gent, Erie, Pa., John R. Schovee, Rochester, N. Y., for Sybron Corp. and Castle Co.; Schovee & Boston, P. C., Rochester, N. Y., Quinn, Gent, Busick & Leemhuis, Erie, Pa., of counsel.
GARTH, Circuit Judge.
May a patent licensee challenge the scope and validity of the underlying patent without first terminating its license agreement? The district court answered this question in the negative by holding that the licensee's failure to exercise the termination provision in the agreement prevented an attack upon the underlying patent. We reverse, holding that Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969) controls.
Each of the parties to this action manufactures and sells gas sterilization apparatus used in modern hospitals. Defendant Sybron Corporation (Sybron), a New York Corporation, owns the McDonald patent
In 1962 Amsco was marketing a product known as the Cryotherm Sterilizer. Castle claimed that the Cryotherm Sterilizer infringed upon its McDonald patent. As a result of this dispute, Amsco, on July 22, 1964, entered into a nonexclusive license agreement with Castle under the McDonald patent.
The license agreement required Amsco to pay royalties to Castle for the sale of sterilizers equipped with the McDonald process as defined in the contract. During
Thereafter, Amsco developed a new sterilizer known as the Medallion. Sybron, as Castle's successor, asserted that the Medallion process came within the license agreement and claimed royalties due on its sale. Denying that the Medallion process infringed the McDonald patent or came within the license agreement, Amsco refused to pay any royalties, thereby giving rise to this action.
II. PROCEDURAL HISTORY
On December 29, 1969 Amsco filed its original complaint against Sybron and Castle in the United States District Court for the Western District of Pennsylvania.
On January 7, 1971 the parties, with the court's approval, entered into a stipulation limiting trial, at that time, to the third count of Amsco's amended complaint — that the Medallion sterilizer was not subject to the license agreement. The stipulation provided that
Following the stipulation Sybron, without answering the first two counts of Amsco's amended complaint, answered Count III. In its answer Sybron claimed by way of counterclaim that it was entitled to a full accounting for all royalties due on the sale of Medallion sterilizers. Amsco answered the counterclaim by asserting as affirmative defenses the same two claims as appear in the first two counts of its amended complaint, i. e., a challenge to the patent's validity (Count I) and to the patent's scope (Count II).
After a trial to the court, the district court filed its opinion on May 26, 1974 holding that the Medallion process came within the license agreement and directing that judgment be entered against Amsco on Count III of the amended complaint. The court also ordered the entry of a judgment for Sybron on the counterclaim in an amount to be determined after a hearing on damages.
From May, 1974 to January, 1975, Amsco, through various motions, attempted on at least three different occasions to
Amsco appeals from the entire judgment of January 24, 1975. Sybron appeals from so much of the judgment as pertains to damages, claiming that the court erred in its calculations. Our jurisdiction is predicated upon 28 U.S.C. § 1291.
III. APPLICABILITY OF THE LEAR DOCTRINE
The district court prevented Amsco from challenging the validity and scope of the McDonald patent. It achieved this result by dismissing all counts of the amended complaint except for Count III and by dismissing Amsco's motions which sought to raise validity and scope as essential issues.
The district court explained in its January 23, 1975 opinion:
The court's reliance upon the doctrine of licensee estoppel — that a patent licensee cannot challenge the underlying patent during the term of the license — would require, if we agreed with the district court, a holding that Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969) does not rule the instant litigation.
In Lear, Inc. v. Adkins, supra, the Supreme Court granted review of a state court judgment to consider whether a patent licensee could allege patent invalidity as a defense to the licensor's suit for royalties. The state court had held, under the doctrine of licensee estoppel, that the licensee was estopped from attacking the patent during the term of the license. Adkins v. Lear, Inc., 67 Cal.2d 882, 64 Cal.Rptr. 545, 435 P.2d 321 (1968) (in banc). The Supreme Court issued a writ of certiorari in Lear to resolve the conflict between the state doctrine of estoppel and the federal policy of "free competition in ideas which do not merit patent protection." Lear, Inc. v. Adkins, supra 395 U.S. at 656, 89 S.Ct. at 1904.
As a matter of federal patent policy, the Court in Lear overruled its prior adherence to the rule that a licensee "may not challenge the validity of the licensed patent in a suit for royalties due under the contract." Automatic Radio Manufacturing Co. v. Hazeltine Research, Inc., 339 U.S. 827, 836, 70 S.Ct. 894, 899, 94 L.Ed. 1312 (1950). In reaching this decision the Court stated:
Lear, Inc. v. Adkins, supra 395 U.S. at 670-671, 89 S.Ct. at 1911. Thus the Court held that the paramount federal policy of allowing "full and free competition in the use of ideas which are in reality a part of the public domain" required rejection of the doctrine of licensee estoppel where the license agreement followed the issuance of the patent.
The instant controversy represents the "most typical situation" analyzed by the Supreme Court in Lear. Here, Amsco obtained its license after the McDonald patent issued.
We cannot agree with Sybron's attempts to distinguish this case from Lear. Sybron contends that Amsco's right to terminate the licensee under paragraph 10 of the License Agreement ensures that Amsco cannot be "muzzled." In Lear the Court reasoned that a licensee may be the only one with sufficient interest to challenge the inventor's discovery. If the doctrine of licensee estoppel prevented the licensee's challenge, i.e., muzzled the licensee, the public might suffer by paying "tribute to would-be monopolists without . . . justification." Lear, Inc. v. Adkins, supra at 670, 89 S.Ct. at 1911. However, Sybron argues that the policy considerations in Lear for rejecting licensee estoppel are not applicable here. It bases this argument on an assumption that the licensee in Lear was unable to terminate its license. We find that assumption to be erroneous.
Although the United States Supreme Court did not discuss the provisions of the Lear license agreement, the state court opinion did. The Lear-Adkins license contained two clauses permitting termination of the license by Lear. Furthermore, the state court expressly found that Lear had failed to terminate the license in accordance with the applicable terms. Adkins v. Lear, Inc., 64 Cal.Rptr. 545, 435 P.2d at 325. Thus, the facts of Lear, Inc. v. Adkins, supra, are identical to the facts here. Both agreements permitted termination, and both licensees failed to comply with the termination provisions. Thus, the Supreme Court's reference to "muzzling" in Lear does not depend upon the presence or absence of a license termination clause.
Sybron alternatively argues that it would be inequitable to follow the Lear decision here. We read the Supreme
Nor do we find merit in Sybron's arguments that Amsco waived its patent invalidity and scope contentions in the district court and, therefore, may not pursue them here. Sybron points to the Supreme Court's decision in Standard Industries, Inc. v. Tigrett Industries, Inc., 397 U.S. 586, 90 S.Ct. 1310, 25 L.Ed.2d 590 (1970), in support of this argument. In Standard Industries, an equally divided court affirmed the award of royalties in a suit by the patent licensor against the licensee. The licensee had not attempted to attack the validity of the patent, and, under the then prevailing doctrine of licensee estoppel, could not have succeeded in such an attempt. On appeal to the Supreme Court, the licensee sought to attack the validity of the patent based on Lear, Inc. v. Adkins, supra.
Like the licensee in Lear but unlike the licensee in Standard Industries, Amsco raised the issues of the validity and scope of the McDonald patent from the commencement of its action. To this date it has neither withdrawn nor receded from its position. Amsco's amended complaint, its affirmative defenses to Sybron's counterclaim, and its various motions preclude any finding of waiver.
We, therefore, hold that the district court erred in denying trial of the patent validity and patent scope
IV. DAMAGES ON THE COUNTERCLAIM
Our determination that this case is controlled by Lear, Inc. v. Adkins, supra, requires that we vacate so much of the district court's order as awarded royalties to Sybron on its counterclaim. In Lear the Court considered whether the licensee would be liable for unpaid royalties prior to the adjudication of the invalidity of the patent. The Supreme Court reasoned as follows:
Id. 395 U.S. at 673, 89 S.Ct. at 1912. Thus, in Lear, where the licensor Adkins
Sybron contends that even if the McDonald patent is found invalid, Amsco nevertheless remains liable for the royalties and interest (as corrected, see note 4 supra) awarded by the district court's order of January 24, 1975. Essentially, Sybron asserts that a patent licensee is responsible for the payment of royalties until either the license is terminated or the patent is declared invalid. As authority for this argument Sybron cites the Sixth Circuit's two decisions in Troxel Manufacturing Co. v. Schwinn Bicycle Co., 465 F.2d 1253 (6th Cir. 1972), 489 F.2d 968 (6th Cir. 1973), cert. denied, 416 U.S. 939, 94 S.Ct. 1942, 40 L.Ed.2d 290 (1974). However, the Troxel case, as the Sixth Circuit recognized,
Atlas Chemical Industries, Inc. v. Moraine Products, supra at 5. Rather, Troxel concerned the liability of a licensee for royalty payments where the licensee did not contest the validity of the patent. In Troxel a third party, a stranger to the license agreement, challenged the patent's validity. The Sixth Circuit held in that circumstance the licensee could not avoid royalty payments until such time as the patent was declared invalid. Troxel Manufacturing Co. v. Schwinn Bicycle Co., 489 F.2d at 973. However, where as here the licensee has attacked the patent and has therefore brought "the type of suit authorized by Lear v. Adkins," Atlas Chemical Industries v. Moraine Products, supra at 5, the Sixth Circuit held that proof of invalidity would free the licensee from liability for all royalties accruing during the course of litigation. Contrary to Sybron's argument, the Sixth Circuit has reached a result identical to ours in a case presenting identical facts.
While intimating no view as to the merits of the patent issues, we recognize that on remand it may be determined that the McDonald patent is valid and not overbroad. If such be the case, Amsco would be liable to Sybron under Sybron's counterclaim and the district court will again have for consideration the calculation of royalties and interest. At such time a damage issue now presented by Sybron's cross-appeal (from the January 24, 1975 order) will again become relevant. Foreseeing this possibility, we consider it appropriate to consider that issue for the district court's guidance.
Sybron argues here that Amsco's accounting methods have made it impossible for it, Sybron, to prove through an independent audit the amount of royalties owing on the sale of sterilizers equipped with the Medallion process. The district court accepted Amsco's calculation as to the royalties owed and it is that figure which is reflected in the district court's order of January 24, 1975.
In Westinghouse Electric & Mfg. Co. v. Wagner Electric & Mfg. Co., 225 U.S. 604, 618-19, 32 S.Ct. 691, 696, 56 L.Ed. 1222 (1912), the Supreme Court held in a patent infringement action that where the profits of the infringer attributable to infringement and noninfringement cannot be separated, "the law places the loss on the wrongdoer." This same result follows where the infringer fails to keep proper records. Gotham Silk Hosiery Co. v. Artcraft Silk Hosiery Mills, Inc., 147 F.2d 209, 214-15 (3d Cir.
Furthermore, should the district court find Amsco liable on the counterclaim, it should determine what, if any, principal and interest should be assessed and from what point in time.
In as much as we cannot forecast the course of the proceedings on remand, we thus cannot predict whether the several damage issues now presented by Sybron on this appeal will again be raised. Nor can we determine at this time, if these issues do surface again, in what form they will be presented and on what record they will be based. Accordingly, we choose not to discuss or pass upon the other damage issues presented by the cross-appeal leaving their resolution, if they arise, to the district court on remand.
Having held that the district court erred in its reading and application of Lear, Inc. v. Adkins, supra, we are obliged to reverse in its entirety the January 24, 1975 judgment, which among other things, denied Amsco a trial on the validity and scope of the McDonald patent,
Each party is to bear its own costs.
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