L. HAND, Circuit Judge.
This appeal is from a judgment for the defendants, entered upon the verdict of a jury in an action to recover treble damages for a conspiracy to violate §§ 1 and 2 of the Sherman Act.
The plaintiffs are partners in the general construction business, and were in 1940 more especially engaged in work for the United States Government. In July of that year, they entered into a contract with the "Bureau of Yards and Docks" of the Navy,
The Aqua Company was organized in 1925 and in 1928 took over the business of its only competitor at that time, the Farr Company, after which until 1938 there was no other company making a hydraulic gasoline distribution system. In that year or 1939 two other companies came into the field in California and combined to form the Flotation Company, just mentioned. On January 12, 1940, the Aqua Company and the Flotation Company made a contract the substance of which was as follows. In consideration of stipulated royalties and of the purchase of its patented parts and its services, the Aqua Company licensed the Flotation Company under thirty patents relating to the hydraulic system within "three territorial groups" of states. The Aqua Company promised not to license anyone else within "Group One," but reserved the right, not only to grant licenses in the other two "groups," but to compete with the Flotation Company in "Group One." In this competition it promised, however, "to quote and sell its patented systems and patented parts * * * at a figure not less than fifteen percent (15%) higher than the price which Flotation pays for said patented system and patented parts"; and to share the profits equally with the Flotation Company, if it made any contract at such an advance. The Flotation Company promised not to install any other system than the defendants', assembled with the patented parts; and not to manufacture the patented parts. "Group One" assigned to the Flotation Company consisted roughly of the Pacific Coast states; the rest of the country — except Alabama and Missouri — was reserved to the Aqua Company. The Flotation Company agreed to buy the patented parts at prices shown in two appended price lists — A and B — but it was free to buy unpatented parts where it pleased. If the Flotation Company bought "List A" parts, it would pay a royalty of one cent a gallon on the capacity of its storage tanks installed in "Group One"; one and one-half cents on those installed in "Group Two"; and two cents on those installed in "Group Three." If it bought "List B" parts, it would pay $500 as a royalty on each tank installed in "Group One"; $600, in "Group Two"; and $650, in "Group Three."
On August 16th, the Aqua Company, which had received the plaintiffs' request for a bid, wrote to the Flotation Company suggesting that it "should not quote" — to the plaintiffs — "less than $6800" for the patented parts necessary for the system, and concluding as follows: "for your information, Pfotzer did not get a price from us before he put his bid in and he was considerably low on the job. They, furthermore, do not
On March 17, 1942, the grand jury for the Southern District of New York returned an indictment against the defendants and others, including the Flotation Company, charging them with a conspiracy to violate the Anti-Trust Acts; on December 9th of that year both defendants pleaded nolo contendere to this indictment, and the Aqua Company was fined $10,000, and Kaestner was fined $6,250. While Kaestner was on the stand, the plaintiffs offered the record of this prosecution to impeach his credibility; but the judge excluded it. The plaintiffs also offered in evidence the correspondence between one, Wrightson, who had charge of the installation of gasoline distribution systems for the Navy, and Kaestner, which, they argued, showed the intimacy of the two, and went to support an inference that the defendants had successfully induced Wrightson to insist upon the installation of their own distribution system. This the judge excluded. The plaintiffs also offered in evidence a report, dated February 11, 1940 (the proper date would seem to have been 1941) from one, Sullivan, an employee, to Kaestner, indicating that Sullivan had been in communication with the naval authorities, and that they proposed to hold the plaintiffs strictly to their contract. It is possible to interpret this report as also showing that it was Sullivan who had prevailed upon the authorities to adopt this position. Part of this the judge admitted, part he excluded. Finally the judge excluded parts of the depositions of Kaestner, taken before trial.
On its main outlines the plaintiffs' case was two-fold: first, the Aqua Company had originally established a monopoly of all the producing capacity of hydraulic gasoline distribution, by buying out the Farr Company and later by making the contract with the Flotation Company. As corroborating evidence of this purpose they also depended upon the correspondence between Kaestner and Wrightson, the admissions in the report of Sullivan, and the Flotation Company's acceptance of the suggestion to overbid the Aqua Company's bid. Second, they argued that the contract with the Flotation Company was by its terms unlawful, because it restrained competition by what was in substance a division of territory. With this as a premise the plaintiffs say that the judge wholly failed properly to explain the law to the jury, or to make clear the issues upon which the case turned; and this is the first question to be considered. After some preliminary remarks which are not relevant, the judge stated: "Now, the gravamen of this action is that a monopoly existed. In consequence of that the plaintiffs were required by the specifications to install a system which could only be furnished by the defendant Aqua or Flotation." In this he was stating the plaintiffs' position; and he next stated the defendants': i.e. "that any of the parts required, or effective substitutes could be procured." Next he spoke of damages; and, as we understand him, on the theory that the Aqua Company's patents were relevant to the issue of damages, he mentioned § 68 of the Patent Law, 35 U. S.C.A., which allows the United States to use patented material and confines the patentee to a claim against the Treasury. He
If the passage which we have quoted is to be understood as an instruction that the jury were to find the plaintiffs guilty of a monopoly, if they had acquired the kind of control which he there defined, we will not say that it might not have been adequate upon the issue of monopoly; and might not have justified the judge's refusal of those detailed requests which the plaintiffs asked him to make and which he refused. We are however left in doubt whether the passage should be so understood, occurring as it did in the midst of a discussion of patents as lawful monopolies. Upon hearing it in its context we should not have understood it as covering the plaintiffs' general claim of monopoly, but as confined to the defendants' misuse of their patents. Moreover, what took place later makes it clear that this is how the judge himself understood them. After the jury had been out for a few hours, they came back and asked for "a copy of the applicable passage of the Sherman Anti-Trust Law and the Clayton Act." The judge again read § 1 of the Sherman Act, and § 1 of the Clayton Act, 15 U.S.C.A. § 12, as he had done before; and then the following colloquy took place: The plaintiffs' counsel said: "Your Honor, the complaint also claims the violation of Section 2 of the Sherman Act, the provision dealing with monopoly. I think the case was tried on the theory that that section may also have been violated here. The Court: I haven't heard anything about that in this case but I will read section 2 (examining) — no, I decline to read section 2 because section 2 as I read it is not pertinent here." Thereupon the jury retired, and after they had gone out the discussion shows that the judge supposed § 2 applied only to criminal prosecutions. Plainly he had never meant to leave to the jury the issue as to how far the Aqua Company had since 1928 gathered into its hands the construction of competing hydraulic gasoline distribution systems. The plaintiffs' requests, though by no means models, called his attention to this position clearly enough to require, if not his acceptance of their clumsy verbiage, at least some plainer statement of the issue than he had given.
Moreover, whatever may be thought of the way in which the issue of monopoly was left to the jury that of "restraint of trade" was certainly inadequate, for to read the words of section one of the Sherman Act told the jury nothing. Even though we were to concede that what he had said just before doing so, was equivalent to saying that the contract between the Aqua Company and the Flotation Company was lawful unless the licensing provisions were meant "to create a monopoly," the instruction was nevertheless wrong, for the contract was unlawful on its face. As to "Group One" the Aqua Company promised
The possession by the Aqua Company of patents upon some of the constituent parts was no excuse for the restrictions thus imposed. Indeed, these were not confined to the patented parts, for the Aqua Company promised to add 15% to the prices which the Flotation Company paid for the "patented system and patented parts," and the Flotation Company promised to pay royalties on the total gallonage of the tanks, or on each tank installed. However, it would not have made the least difference, if the restrictions had been limited to the patented parts. Its possession of the patents did not give the Aqua Company any immunity from § 1 of the Sherman Act, for it restricted its freedom to make and sell the patented articles and that freedom it derived from the common law, not from the patent law.
The next alleged error is the exclusion of the record of the indictment against Kaestner and his sentence under the plea of nolo contendere, offered to impeach his cross-examination. We do not understand that the plaintiffs assert that this was admissible under § 5 of the Clayton Act;
There remains only the competency of the other documents which the judge excluded. The correspondence between Kaestner and Wrightson, coupled with the Sullivan report, were rationally relevant to the question whether Kaestner and the Aqua Company were trying to influence the naval authorities to keep out any other hydraulic gasoline distribution systems. It was not necessary to prove that there was any corrupt bargain between them; it was enough, if the correspondence threw light upon the efforts of the Aqua Company, and served to prove they had acquired control, and meant to keep it. That made the correspondence admissible on the issue of monopoly. The deposition of Kaestner taken before the trial was admissible as evidence: in chief, if Kaestner was an officer of the Aqua Company when it was taken (Rule 26 (d) (2)); and in any event, to contradict his testimony on the stand (Rule 26(d) (1)).
There was some evidence of damages.
Judgment reversed; new trial ordered.