Duplan Corp. v. Deering Milliken, Inc.
444 F. Supp. 648 (D.S.C. 1977)
The United States District Court, D. South Carolina
Decided July 29, 1977
B. Bell, Charles B. Park, III, John J. Barnhardt, III, of Bell, Seltzer,
Park & Gibson, Charlotte, N. C., and Fletcher C. Mann of Leatherwood,
Walker, Todd & Mann, Greenville, S. C., for Burkyarns, Inc., The
Duplan Corp., Frank Ix & Sons Virginia Corp., Jonathan Logan, Inc.,
Lawrence Texturing Corp., Schwarzenbach Huber Co., United Merchants &
David L. Foster, Allan Trumbull, Michael C. Lambert, Richard A. Van
Dusen of Willkie, Farr & Gallagher, New York City, for The Duplan
Corp. and Lawrence Texturing Corp.
John W. Malley, William K. West, Jr., Lawrence A. Hymo, W. Warren
Taltavull of Cushman, Darby & Cushman, Washington, D. C., and O. G.
Calhoun, Jr., of Haynsworth, Perry, Bryant, Marion & Johnstone,
Greenville, S. C., for Burlington Industries, Inc., National Spinning Co.,
and Leon Ferenbach, Inc.
McNeill Smith, Michael R. Abel of Smith, Moore, Smith, Schell &
Hunter, Greensboro, N. C., and David Rabin, Greensboro, N. C., for Texfi
Industries, Inc., Dixie Yarns, Inc., Reliable Silk Dyeing Co., Inc.,
Spring-Tex, Inc.,Blanchard Yarn Co., Inc., and Olympia Industries, Inc.
David Rabin, Greensboro, N. C., for TexElastic Corp. and Hemmerich
Paul, Weiss, Rifkind, Wharton & Garrison, Morgan, Finnegan,
Pine, Foley & Lee, New York City, Butler, Means, Evins & Browne,
Spartanburg, S. C., for Chavanoz S. A. (formerly Moulinage et Retorderie
de Chavanoz), Milliken Research Corp. (formerly Deering Milliken Research
Corp.) and Milliken & Co. (formerly Deering Milliken, Inc.); Simon H.
Rifkind, Jay H. Topkis, Jay Greenfield, Cameron Clark, Victoria G. Traube,
Howard S. Veisz, Granville M. Pine, Harry C. Marcus, Kurt E. Richter,
Eugene Moroz, John F. Sweeney, New York City, of counsel.
Arthur O. Cooke of Cooke & Cooke, A. Wayland Cooke, Greensboro,
N. C., for ARCT, Inc.
Brumbaugh, Graves, Donohue & Raymond, Granville M. Brumbaugh,
James N. Buckner, Granville M. Brumbaugh, Jr., New York City, for ARCT-France.
MEMORANDUM OF DECISION
DUPREE, District Judge.
This patent-antitrust litigation consisting of thirty-seven
separate actions consolidated for purposes of trial has been tried to the
court without a jury on the liability issues only, and in this memorandum
of decision the court will record its findings of fact and conclusions of
law in compliance with Rule 52(a), F.R.Civ.P. Jurisdiction is based on 28 U.S.C. ss 1331, 1332, 1337, 1338,
2201 and 2202.
HISTORY OF THE LITIGATION
The first of the many complaints involved here was filed in the
Spartanburg Division, United States District Court for the District of
South Carolina, on August 8, 1968, as Case No. 68-705.
In this original suit Deering Milliken Research Corporation (DMRC)
and Moulinage et Retorderie de Chavanoz (Chavanoz) sought recovery of
royalties alleged to be due by Textured Fibres, Inc., as a sub-licensee of
DMRC which in turn was the exclusive use-licensee in the United States of
certain apparatus and process patents issued to Chavanoz in the United
States and relating to the false twist texturing of synthetic yarns. [FN1]
Similar suits were thereafter instituted by DMRC and Chavanoz
against various other textile manufacturers (Throwsters) engaged in the
yarn texturing business.
For a more detailed explanation of yarn texturing generally and
"false twist texturing" see Appendix A attached hereto.
On November 25, 1969, the Duplan Corporation instituted in the
United States District Court for the Southern District of New York the
first of a series of actions by the Throwsters against DMRC and Chavanoz
attacking the validity of the Chavanoz patents and asserting claims under
the antitrust laws. Joined as
defendants with DMRC and Chavanoz in these Throwster actions were Deering
Milliken, Inc. (DMI), of which DMRC is a corporate subsidiary, Ateliers
Roannais de Constructions Textiles (ARCT-France), a French manufacturer of
textile machinery, and ARCT, Inc., a corporate subsidiary of ARCT-France
organized under the laws of North Carolina for the purpose of selling in
the United States the textile machinery manufactured by ARCT-France and
embodying the Chavanoz patents. These actions by the Throwsters were followed by countersuits
and counterclaims by DMRC and Chavanoz for unpaid royalties and patent
At that time the thirty-seven actions were pending in the federal
courts in South Carolina, North Carolina, Virginia and New York. After
treatment by various United States District Courts and a Panel on
Multi-District Litigation all of the cases, which by this time involved
generally the same basic issues of unpaid royalties, patent validity and
infringement, patent misuse and alleged antitrust violations, were
consolidated in the District of South Carolina in 1971 as Civil Action No.
71-306. The thirty-seven
actions are listed in Appendix B attached hereto.[FN2]
Several of the parties to these actions have undergone corporate name
changes during the pendency of the litigation, and during the course of
the trial the Duplan Corporation has become involved in reorganization
proceedings under the Bankruptcy Act.
An appropriate order noting these changes will be entered, but for
the sake of convenience the original names of the parties will be used
throughout this memorandum.
Assigned originally to the Honorable Donald Russell, these cases
were re-assigned to the Honorable Robert W. Hemphill of the District of
South Carolina upon Judge Russell's elevation to a seat on the Court of
Appeals for the Fourth Circuit in 1971. Thereafter Judge Hemphill assumed charge of the litigation,
held numerous hearings, ruled on innumerable motions involving procedural,
evidentiary and summary judgment matters and personally presided over the
taking of a massive volume of deposition testimony in this country and in
France. A summary of the
previously-reported rulings and decisions in the case is attached as
The prodigious work of Judge Hemphill is summarized in a footnote
to one of his decisions, Duplan Corporation v. Deering Milliken, Inc., 400
F.Supp. 497 at page 502 (D.S.C.1975). That case was concerned with a recusal motion filed by
counsel for DMRC, DMI and Chavanoz which after characteristically careful
and painstaking consideration Judge Hemphill denied. The decision was not appealed.
Because of the press of other duties (see 400 F.Supp. at page 526,
Footnote 159) Judge Hemphill thereafter asked to be relieved from further
duties in this litigation, and the same was assigned to this writer.
Pre-trial conferences were held at Raleigh, North Carolina, on
March 26 and June 4, 1976. The
Throwsters who were aligned in interest on one side of the case were
designated as plaintiffs and the parties opposing the Throwsters, DMRC,
DMI, Chavanoz, ARCT-France and ARCT, Inc., were designated as defendants
and will be so referred to during the course of this memorandum. The trial which was commenced at Rock Hill, South Carolina,
on June 14, 1976 consumed ninety-one trial days and with periodic recesses
was concluded on February 11, 1977.
THE PARTIES AND THEIR ALIGNMENT
The plaintiffs are companies, or divisions of companies, whose businesses involve the processing of synthetic filament yarns in order to make them suitable for a wide variety of end uses. Each plaintiff is a corporation organized and existing under the laws of the state indicated below and conducts its principal texturing activities in the city indicated:
State of Principal
Blanchard Yarn Company, Inc.
Burlington Industries, Inc.
Dixie Yarns, Inc.
The Duplan Corporation
Frank Ix & Sons Virginia
Hemmerich Industries, Inc.
Jonathan Logan, Inc.
Lawrence Texturing Corporation
Johnson City, Tenn.
Madison Throwing Company
National Spinning Company, Inc.
Olympia Industries, Inc.
Reliable Silk Dyeing Company, Inc.
New York New
New Jersey Luray, Va.
High Point, N.C.
Texfi Industries, Inc.
Lumberton and New Bern,
United Merchants & Manufacturers,
The defendants opposing the Throwster plaintiffs are the following
1. DMRC is a South Carolina corporation and is a wholly-owned subsidiary of DMI. It is the successor to Deering Milliken Research Trust, and its newly- acquired corporate name is Milliken Research Corporation. Under a license agreement with Chavanoz, DMRC is the exclusive use licensee in the United States and Canada of the right to use the Chavanoz patents in suit and the right to grant sublicenses.
2. DMI is a Delaware corporation which maintains a place of
business in New York, but its headquarters and much of its manufacturing
operations are maintained in South Carolina.
Its newly-acquired corporate name is Milliken & Company.
DMI is a diversified textile manufacturer.
3. Chavanoz is a French "societe anonyme" with its
principal place of business in Chavanoz, France.
Chavanoz is the owner of the eight patents in suit.
4. ARCT-France is a French corporation with its principal place of
business in Roanne, France. It
is a manufacturer of various kinds of textile machinery, and under
contractual arrangements with Chavanoz, ARCT-France is the exclusive
licensee of the rights to make and sell the inventions made pursuant to
the Chavanoz patents.
5. ARCT, Inc., is a North Carolina corporation with its principal
place of business at Greensboro, North Carolina.
It was formed in 1966 by ARCT-France for the purpose of
distributing in the United States the textile machinery manufactured by
In addition to the named defendants herein, other persons and
concerns are alleged to have conspired with the defendants in one or more
of the antitrust offenses charged, including: Leesona Corporation
(formerly known as Universal Winding Company) ("Leesona"), the
Permatwist Company ("Permatwist"), a partnership whose members
are Warren A. Seem, Nicholas J. Stoddard, Fred Tecce and Harold P. Berger,
and Whitin Machine Works ("Whitin").
a. Leesona is a Massachusetts corporation with its principal place
of business in Warwick, Rhode Island. Leesona is a manufacturer and seller of false twist and other
textile machinery and has licensed patents and technology relating to
false twist and post-treating.
b. Permatwist is a Pennsylvania partnership which has been engaged
in the promotion and licensing of apparatus and processes relating to
false twist and post-treating.
c. Whitin was a Massachusetts corporation engaged in the
manufacture and sale of textile machinery with its principal place of
business in Whitinsville, Massachusetts.
Prior to 1966, Whitin purchased ARCT false twist machines from ARCT-France
and was the exclusive distributor of such machines in the United States.
The acts alleged to have been done by the corporate defendants and
their alleged co-conspirators have been carried out by their officers,
directors or employees, including but not limited to, the following:
a. Norman C. Armitage was an officer of DMRC and from time to time
an officer of DMI. Dr.
Armitage, who was a lawyer, was in charge of the business, legal, policy
and administrative aspects of DMRC's false twist licensing program from
its inception until his death in 1972.
b. Leo M. Soep was a French "conseil en brevets" employed
until about 1966 by Comptoir des Textiles Artificiels, an affiliate of
Chavanoz. Soep represented
Chavanoz in connection with its false twist activities.
After 1966 he became an independent conseil en brevets but
continued to perform services for Chavanoz.
From time to time Soep represented ARCT-France in connectionwith
its false twist activities. From
1966 until his death in 1971, Soep owned five per cent of the issued and
outstanding shares of ARCT, Inc., and was a member of its board of
c. Henri Crouzet was at all relevant times the president of ARCT-France,
and also, from the time of its formation in 1966, the president and member
of the board of directors of ARCT, Inc.
d. Yves de Moncuit was at all relevant times an officer of Chavanoz
and the Chavanoz employee who worked with Leo Soep on false twist matters.
In 1969 or 1970 he became president of Chavanoz.
e. Robert F. Waters handled all ARCT false twist machinery sales
for Whitin from 1959, when the first ARCT false twist machines were
introduced in the United States, through 1965. Since the formation of ARCT, Inc. in 1966, Waters has been
its executive vice president in actual control of its day-to-day
operations, a member of its board of directors, a shareholder, and has
continued to be the prime salesman for ARCT false twist machinery in the
f. Walter E. Mueller was chief house patent counsel for DMRC (and
its predecessor Deering Milliken Research Trust) from April, 1951 to March
g. Robert Leeson, at all relevant times until 1967, was the
president and chief executive officer of Leesona. Mr. Leeson was also chairman of the board of Leesona from
1956 or 1957 until at least February, 1972.
h. Albert P. Davis was at all relevant times the house patent
counsel for Leesona.
At one time there were twenty-two Chavanoz patents in suit. Prior to trial twelve of the patents had been held not infringed on motions for summary judgment, and two of the patents had been held invalid under 32 U.S.C. s 102(d). Eight patents remain in suit. They are United States Patents Nos.
Plaintiffs allege in complaints, counterclaims and affirmative
defenses against DMRC and Chavanoz that these remaining Chavanoz patents
are invalid and not infringed. They
seek declaratory judgments of invalidity and non- infringement.
They deny any liability for royalties or for patent infringement.
They also allege that DMRC, DMI, Chavanoz, ARCT-France and ARCT,
Inc., have violated Sections 1 and 2 of the Sherman Act, 15 U.S.C. ss 1
and 2, and have committed acts of patent misuse.
The antitrust claims fall into two categories: (a) the claim of a
vertical conspiracy between the named defendants arising out of the
license and sub- license agreements and the manner in which the business
of the defendants was conducted, and (b) a claim of horizontal conspiracy
between the named defendants and Leesona arising out of agreements entered
into in 1964 which settled certain patent litigation then pending between
Leesona and the defendants. The misuse claims relate to proceedings before
the Patent Office, license provisions and the conduct of the present
litigation by the defendants.
As previously indicated, the first of the actions here involved was
brought by DMRC against Textured Fibres, Inc. (now Texfi Industries,
Inc.), on August 8, 1968, as a simple contract action for the recovery of
alleged unpaid royalties in the amount of $45,691.45.
Following the institution of the suit by Duplan Corporation on
November 25, 1969, seeking a declaratory judgment of invalidity and
non-infringement as to the Chavanoz patents and alleging antitrust
violations and patent misuse DMRC asserted claims or counterclaims against
each of the plaintiffs for breach of the sub-license agreements arising
out of plaintiffs' refusal to pay royalties and infringement of the
Chavanoz patents arising out of the plaintiffs' continued use of the ARCT
machines embodying the Chavanoz patents following repudiation or
termination by the plaintiffs of the sub-license agreements.
Chavanoz, which is not a party to the sub-license agreements, has
joined DMRC in asserting claims of patent infringement and, of course, is
defending against plaintiffs' claims of antitrust violations and patent
ARCT-France, ARCT, Inc., and DMI disclaim any interest in or to the
patents in issue and therefore make no claims for infringement damages or
royalties against the plaintiffs. In
their answers these three defendants have denied any liability to the
plaintiffs by reason of the alleged antitrust violations.
All questions of damages, if any, to which any party may be found
entitled having been reserved for trial at a later time, the issues
arising on the pleadings to be resolved by the court at this time fall
into four categories:
II. PATENT MISUSE
III. PATENT VALIDITY AND INFRINGEMENT
IV. NONPAYMENT OF ROYALTIES
These issues will be treated in the succeeding sections of the
THE ANTITRUST ISSUES
A. The Vertical Conspiracy.
The facts on which the plaintiffs' allegations of antitrust
conspiracy between the parties defendant in the chain of distribution are
based are not in substantial dispute, the plaintiffs contending that the
alleged restraints of a vertical nature are set forth in writing in the
instruments the defendants signed. A
review of the essential provisions of these agreements is therefore in
1. The Chavanoz-ARCT Agreements.
On October 30, 1954, Chavanoz entered into an agreement with ARCT-France
Agreement") under the terms of which Chavanoz granted to ARCT-France
"the exclusive right to manufacture and sell" the inventions
described in certain Chavanoz false twist patents and patent applications
as well as any later improvements. At that time Chavanoz owned French
Patent No. 1,054,338 and two applications (Nos. 52,346 and 54,253) for
certificates of addition, but it owned no United States patents relating
to false twist.
The pertinent provisions of the 1954 agreement were as follows:
"1. (Chavanoz) grants to ARCT the exclusive right to
manufacture and sell the devices described in the patent and additions
mentioned above as well as any later improvement.
"4. . . . (T)he
rights of industrial property are reserved exclusively for (Chavanoz)
including those attached to the new models.
Any application for a patent that could concern such new models
must be made by (Chavanoz) in its name and at its expense. ARCT will take
the necessary steps to inform (Chavanoz) promptly of any improvements so
as to allow it to insure adequate protection of which (Chavanoz) is the
"6. ARCT shall not deliver the patented material to any firms
other than licensees of the HELANCA process, except in the case of a prior
and written authorization from (Chavanoz).[FN3]
Paragraph 6 of the 1954 agreement prohibiting ARCT from delivering its
machines to firms other than the licensees of the "HELANCA"
process was included by Chavanoz to carry out its contractual commitment
to a Swiss company, Heberlein, reading as follows:
"Chavanoz undertakes for ARCT to deliver its machines only to
firms which sign the licenses mentioned in Articles 1 and 2 with Heberlein,
regardless of the fact of whether the Chavanoz patents constituting the
subject of the present contract exist or do not exist in the countries
Under a 1958 modification to the 1954 agreement ARCT-France was
relieved from the provisions of paragraph 6 as to certain countries, not
including the United States, and under certain conditions.
"7. In exchange for the present exclusive grant, ARCT shall
pay to (Chavanoz) royalties on all the material built and invoiced by ARCT
or by its sub- licensees by virtue of the present document, delivered to
any firms other than (Chavanoz). The royalties shall be as follows . . .
(ten per cent for first year decreasing annually to two per cent
for the sixth and following years).
"9. The present license for construction and sale is granted
and accepted for the duration of the main patent (French Patent No.
1,054,338), and it shall come into effect on the day the first
mass-produced machine following the prototype is delivered."
Thereafter Chavanoz obtained United States patents corresponding to
the French patent and applications which were issued as United States
Patents Nos. 2,741,893 (the "bathtub" patent so-called because
of the similarity in shape of the vessel designed to contain a hot liquid
through which the yarn passed during processing to a conventional
bathtub); 2,761,272; 2,780,047; 2,823,513; and 2,823,514.
Since the 1954 agreement covered "improvements" as well
as the existing French patent and applications and was worldwide in scope,
these and subsequent United States patents obtained by Chavanoz relating
to false twist came under the 1954 agreement.
All five of these patents were held by Judge Hemphill on motions
for summary judgment to be non-infringed by any ARCT machine purchased by
the plaintiffs in this action.
Chavanoz and ARCT-France entered into a revised agreement dated
July 18, 1962 (The "1962
Agreement") which consolidated "in a comprehensive
instrument" the 1954 agreement and a "number of verbal
agreements" stating "the parties are at one in considering that
the various agreements should be brought into line and consolidated in a
comprehensive instrument." The
essential provisions of the 1962 agreement were as follows:
"1. (Chavanoz) grants to (ARCT) the exclusive right of
construction and sale in the whole world of the devices described in the
patents and patents of addition listed on the attached List A, as well as
of any subsequent improvement in the field of the manufacture of crimped
textile yarns, either natural, artificial or synthetic, curled through the
application of a false twist which is heat set, and in the yarns which may
be obtained from said crimped or curled yarns, through an additional
treatment or shaping. This
field is called the 'field of the patents'.
"4. All patent rights attached to the improvements in the
field of the patents remain the property of (Chavanoz).
Any patent application which may concern new models must be filed
by (Chavanoz) in his name and at his expense, and (ARCT) must take all
necessary measures so as to diligently communicate the improvements to (Chavanoz)
to enable him to assure adequate protection, of which (Chavanoz) remains
the only judge.
"7. (ARCT) has filed in its name the patents listed on List B
and the patents have been assigned to (Chavanoz) with a retrocession of
the complete freedom of exploitation outside of the field of the patents .
"8. (ARCT) shall deliver the devices under the present
contract only to the holders of a process license which is granted by (Chavanoz),
except in the case of a prior and written authorization by (Chavanoz).
In the countries where (Chavanoz) has no patents, (ARCT) may
deliver without authorization.
"9. (ARCT) pays to (Chavanoz) in exchange for the exclusive
right of construction and sale according to Article 1 and the technical
assistance according to Article 2 ('the drawings and models of the
prototypes made by the patentee'), a royalty which is two per cent of the
value before taxes, leaving factory, electric motors not included.
"11. The present license of construction and sale is granted
and accepted for the duration of the French Patent No. 1,054,338 (U.S.
Patent No. 2,741,893 the "bathtub" patent).
"19. By reason of the technical assistance supplied by (Chavanoz)
according to Articles 1 and 2, the present contract is not cancelled in
the case of the complete invalidity of the patents of List A, but in this
case the protection according to Article 15 is de facto eliminated."
An additional French patent of addition (No. 67151) issued
subsequent to the 1954 agreement was listed in List A attached to the 1962
agreement, but apparently no United States patent was issued corresponding
to it. Of the six French
patents assigned by ARCT to Chavanoz as shown on List B, United States
patents were obtained on two of them (French Patent Nos. 1,126,065 and
1,216,847) and these two United States Patents, Nos. 2,788,634 and
3,177,361, were held by Judge Hemphill not to have been infringed by the
The royalties payable by ARCT to Chavanoz under the 1954 and 1962
agreements were in fact paid, and there was no difference in the royalty
rate for machines sold in the United States where customers also paid a
production royalty for use of the machines and the royalty rate paid on
machines sold in countries where no use royalty was payable.
2. The Chavanoz-DMRC Agreements.
On December 31, 1957, DMRC and Chavanoz signed an agreement giving
DMRC the exclusive use rights in the United States and Canada under the
Chavanoz false twist patents with the right to grant sub-licenses.
The pertinent portions of this agreement were as follows:
"1. Chavanoz hereby grants to DMRC throughout the United
States, its territories and dependencies and Canada upon the conditions
hereinafter set forth and subject to certain rights of cancellation as
defined below, an exclusive license to use the FT process and FT machines
for the purpose of making, using and selling (false twist) yarns in
accordance with technical information and the inventions of the FT patents
set forth in Appendix 'A' appended hereto, with the right to grant
sublicenses in the United States and Canada.
The right to manufacture and sell FT machines in accordance with
said FT patents is specifically excepted.
"3. The manufacture and delivery of FT machines by ARCT or its
sublicensees for use in the United States and Canada shall, as between
Chavanoz and DMRC, be the responsibility of Chavanoz and Chavanoz shall
direct ARCT or ARCT's sublicensees for the manufacture and sale of FT
machines to sell or deliver FT machines in the United States and Canada
only to parties sublicensed by DMRC to use the machines, such sublicenses
and parties being respectively referred to hereinafter as 'use licenses'
and 'use licensees' . . .
"DMRC under its rights to sublicense hereunder shall issue use
licenses to reputable customers of ARCT or of ARCT's sublicensees when
called upon by ARCT or ARCT's sublicensees so to do, but shall have the
right to refuse the grant of a use license to any parties for sufficient
cause. The grant of a use
license shall not be arbitrarily or unreasonably withheld . . .
"9. DMRC shall charge its use licensees royalties in the
amount of five per cent of the manufacturer's list price of the raw yarn
which is converted to mousse (false twist) yarns by such use licensees
according to the FT process or on FT machines and is sold or used;
provided, however, that this rate of royalty may be reduced by DMRC and at
its discretion to a figure of not less than two and one-half per cent if
there is substantial unlicensed competition by producers using the FT
process or FT machines embodying the inventions of this agreement to the
extent of at least 10,000 pounds of (false twist) yarn per month and
further provided, that DMRC shall exact from each use licensee a minimum
annual royalty of $1,000.00 payable in advance.
"10. DMRC shall remit to Chavanoz fifty per cent of all
revenues which DMRC itself receives from the use licensees . . .
"15. This agreement and the license granted hereunder, unless
sooner terminated or cancelled as hereinafter provided, shall continue for
a period until expiration of the last patent to issue to Chavanoz in the
United States and Canada respectively."
In addition to the quoted provisions the agreement also required
Chavanoz "to furnish to DMRC all the technical information and
know-how Chavanoz possesses in the field of the FT process", and
there was a grant-back provision requiring DMRC to assign to Chavanoz
improvements in the FT process made by DMRC and to include in its
sublicense agreements a provision requiring its sub-licensees to grant
Chavanoz a license in the sub-licensees' own country under any such
improvements and to assign all foreign rights to Chavanoz without payment
DMRC and Chavanoz executed six supplemental agreements between 1957
and 1962 under the terms of which Mexico was added to the territory in
which DMRC was given use rights, the grant-back provision in the 1957
agreement was first modified and then deleted, the royalty rate was fixed
at two and one-half per cent and DMRC was authorized to grant
non-commercial use licenses with no minimum royalty.
A further supplemental agreement provided that the sub- licenses
granted by DMRC would not ipso facto terminate "if for any reason the
exclusive license granted DMRC by Chavanoz is terminated."
On December 28, 1962, DMRC and Chavanoz entered into a new basic
agreement which revised the 1957 agreement, but in all material respects
it remained the same as the 1957 agreement as modified by the intervening
With a few subsequent modifications, the 1962 DMRC-Chavanoz
agreement remained the basic agreement between them until after the
commencement of the present litigation.
One of the modifications incorporated the terms of an agreement
between DMRC, Chavanoz and Whitin in June, 1963 increasing the royalty
rate to three and one-half per cent with all but .6% Being escrowed for
return to the licensees in the event of the unsuccessful defense of
litigation then pending between the Leesona Corporation, DMRC, Chavanoz
3. The ARCT-France-Whitin Agreement.
On February 20, 1959, ARCT-France and Whitin Machine Works entered
into an agreement under which Whitin was granted the exclusive right to
sell ARCT false twist machines in the United States, Canada and Mexico.
(An option granted Whitin to manufacture the machines was never
exercised.) Following several recitals including reference to the 1954
agreement between Chavanoz and ARCT- France and the fact that Chavanoz has
granted to DMRC "the exclusive right and the right to grant
sub-licenses to practice and use the processes covered by said (Chavanoz)
patents in the USA, Canada and Mexico" the agreement contained the
provision that "Whitin agrees to sell FT machines only to persons or
firms approved by (Chavanoz) and/or DMRC."
While the agreement speaks in terms of Whitin's acting "as a
selling agent for such machines", in practice Whitin purchased the
machines outright from ARCT- France and took title to them at the French
port of embarkation. At that time ARCT-France parted with all dominion and control
over the machines and the risk of loss was transferred to Whitin.
Whitin had the absolute right to set its own price for the resale
of these machines to Throwsters in the United States, Canada and Mexico.
4. The ARCT-France-ARCT, Inc., Agreement.
In February, 1966, ARCT, Inc., was organized as a North Carolina
corporation to undertake to sell the ARCT machines in the United States.
Stock in this new corporation was owned sixty per cent by ARCT-France,
thirty-five per cent by Robert Waters, who had been Whitin's sales manager
for the ARCT machines, and five per cent by Leo Soep, a French "conseil
en brevets" [FN4], who, in addition to representing Chavanoz in
patent matters, also negotiated agreements in patent and other matters on
behalf of ARCT-France from time to time including the Whitin agreement.
As stated by Judge Widener in Duplan Corporation v. Derring Milliken,
Inc., 540 F.2d 1215, 1218, Footnote 3 (4th Cir. 1976), "The American
legal system apparently has no direct equivalent to the French conseil en
brevets. For our purposes,
however, it is sufficient to note that Soep was not a lawyer, but, at all
times relevant here, represented Chavanoz in patent matters."
With the formation of ARCT, Inc., Robert Waters left Whitin, where
he had been responsible for the sale of all ARCT false twist machines in
this country, to become executive vice president and director of ARCT,
Inc., in actual control of its day-to-day operations.
On February 7, 1966, ARCT-France and ARCT, Inc., entered into an
agreement for the purchase of ARCT machines from ARCT-France by ARCT, Inc.
This agreement provided that "property in the machine and risk
of loss will shift to ARCT, Inc., upon delivery to the ocean carrier at
the French port of embarkation" and that ARCT, Inc., had the absolute
right to set its own resale price to its Throwster customers.
Although Whitin retained the right to distribute the machines after
the formation of ARCT, Inc., it in fact went out of that business and did
not sell any false twist machines thereafter, and since 1966 ARCT, Inc.,
has acted as the distributor of ARCT false twist machines in the United
The written agreement between ARCT-France and ARCT, Inc., contained
no express covenant, such as that found in the ARCT-France-Whitin
agreement, restricting the resale of ARCT machines by ARCT, Inc., to DMRC
licensees, but in practice ARCT, Inc., did in fact so restrict delivery of
the machines until well after the institution of this litigation.
The sales contracts of ARCT, Inc., and its predecessor, Whitin,
contained no reference to the DMRC use license or the fact that DMRC had
any use rights in the Chavanoz patents, but the Throwster purchasers were
routinely informed by Waters while he was employed by Whitin and later by
ARCT, Inc., that it would be necessary to obtain a use license from DMRC
before the machinery could be placed in operation.
It was also publicly announced in trade publications as early as
April, 1959, that Chavanoz had granted DMRC the right to license users of
the ARCT machines in the United States which Whitin had been licensed to
manufacture and sell, and it was common knowledge in the trade that a DMRC
use license was required to operate these machines.
5. The Standard DMRC License Agreement.
Prior to the sale of the first ARCT machine in the United States
DMRC prepared with Chavanoz's approval a printed form standard license
agreement (the "DMRC Use License") to be signed by all
purchasers of ARCT machines. The
subject matter of the DMRC use license, which was signed by each of the
plaintiffs in substantially identical form, is spelled out in the
"Whereas" clauses as follows:
"WHEREAS, DMRC has an exclusive license throughout the United
States, Canada and Mexico with the right to a grant sublicenses under
certain inventions and technical information relating to processes and
devices for the manufacture of crimped synthetic yarns based upon the
application of a false twist (such processes and devices being hereinafter
referred to respectively as 'FT processes' and 'FT machines'), which
inventions are described in United States patents and/or applications for
Letters Patent in the United States, owned by MOULINAGE ET RETORDERIE DE
CHAVANOZ (hereinafter referred to as CHAVANOZ) and listed in Appendix 'A'
appended hereto, together with certain improvements thereon as such may
hereafter be made or acquired by CHAVANOZ and any patent applications
and/or patents in the United States relating thereto, to use said
processes and devices for the purpose of making said crimped yarns for use
and sale, such right of DMRC under the inventions, applications and
patents aforesaid being hereinafter referred to as 'FT PATENT RIGHTS,' and
"WHEREAS, LICENSEE desires a use license to use processes and
devices embodying the inventions of said FT PATENT RIGHTS, . . ."
The pertinent contractual provisions of the agreement are as
"1. DMRC hereby grants to LICENSEE upon the conditions
hereinafter set forth and subject to certain rights of cancellation as
defined below, a nonexclusive and nontransferable use license for a period
until expiration of the last patent to issue in the United States, upon
which said FT PATENT RIGHTS are based, to use the FT processes and FT
machines for the purpose of making for use and sale crimped yarns in
accordance with technical information and the inventions of said FT PATENT
RIGHTS. The use license
hereby granted is restricted as to the use of the FT process and FT
machines to the plants of the LICENSEE situated in the United States, but
subject to intervening rights, if any, of third parties, the crimped yarn
manufactured by such use may, as between DMRC and LICENSEE, be sold freely
in all of the countries of the world.
"2. DMRC has already furnished to LICENSEE certain technical
information relative to the present inventions, which LICENSEE
acknowledges, and as promptly as practicable after the date of this
agreement DMRC shall furnish to LICENSEE such additional technical
information and 'know-how' as is necessary in DMRC's opinion to enable
LICENSEE to practice the inventions licensed hereby and shall from time to
time while this agreement is in effect furnish further additional
information as it similarly deems necessary to supplement information
heretofore furnished hereunder, provided, however, there shall be no
obligation on the part of DMRC or itslicensor to perform any additional or
future research or development in the field of the inventions covered by
this agreement. DMRC shall
disclose to LICENSEE said additional information and 'know-how' after mill
test has in DMRC's judgment confirmed that an improvement has been made
and within sixty (60) days after the improvement has in DMRC's judgment
been successfully reduced to practice in commercial production.
If DMRC hereafter makes or acquires any improvements of the
inventions of FT PATENT RIGHTS upon which it obtains patents, it shall
then grant to LICENSEE licenses to use such improvements at no increase in
royalty by incorporation of such patents into FT PATENT RIGHTS under the
present agreement. LICENSEE
shall be entitled to send its engineers or other personnel to DMRC or its
designee for the purpose of obtaining instructions as to the best methods
of practicing these inventions, and may request DMRC to send to LICENSEE
upon terms to be mutually agreed upon technical personnel for the purpose
of instructing LICENSEE at LICENSEE's premises in the said best methods of
practicing the inventions.
"3. LICENSEE shall disclose to DMRC within thirty (30) days of
the first use or embodiment thereof in commercial practice, any
improvements of the FT process or FT machines, whether or not patentable,
conceived and made by LICENSEE or its employees subsequent to the date of
this agreement and shall grant to DMRC or its designee throughout the
United States, its territories and dependencies, a nonexclusive license
thereunder and any patent application or patent thereon with the exclusive
right in DMRC or its designee to sublicense its licensees and sublicensees
thereunder for the life of the last patent to issue in the United States
of the patents upon which said FT PATENT RIGHTS are based, said
improvements being available for use by LICENSEE, and LICENSEE shall
assign to DMRC or its designee all foreign rights thereto, all without
payment of royalties. (This
grantback clause deleted after 1961.)
"4. Except as hereinafter provided, LICENSEE shall pay DMRC
during the life of this agreement royalties in the amount of two and
one-half per cent (21/2%) (later 31/2%) of the manufacturer's list price
of the raw yarn (but including any customs tariff on yarn imported from
abroad) which is converted to crimped yarn by LICENSEE according to the FT
process or on FT machines and is sold . . .
The present use license is related only to the use of FT machines
manufactured under license of CHAVANOZ by Ateliers Roannais de
Constructions Textiles, of Roanne, France, referred to hereinafter as 'ARCT,'
or its sublicensees, and LICENSEE is required to pay royalties under the
provisions of the present paragraph only upon the production of such
machines, provided that LICENSEE shall have the right to include under
this use license the use of any other false twist or FT process or any
other false twist or FT machine upon notice to DMRC, whereupon royalties
upon the production thereof shall thereafter be payable in accordance with
the above provisions.
"5. LICENSEE shall pay to DMRC a minimum annual royalty of One
Thousand Dollars ($1,000.00) in United States currency, the first said
payment to be made upon the signing of this agreement by LICENSEE and
succeeding payments upon each anniversary of the execution of the
agreement. These minimum
royalties in their entirety shall be respectively credited against
royalties accruing under paragraph 4 hereof in the next succeeding twelve
(12) months but shall not be credited against any royalties payable
"9. DMRC warrants that CHAVANOZ has undertaken that, in the
event that LICENSEE is threatened with suit or is sued for patent
infringement based upon the use of techniques or procedures specifically
recommended by DMRC to LICENSEE hereunder, CHAVANOZ shall upon request
from LICENSEE (transmitted through DMRC) defend such suit at the expense
of CHAVANOZ insofar as such alleged patent infringing activities may be
involved; provided that DMRC is notified promptly in writing of all such
claims of or suits for infringement, and further provided that any damages
awarded or expenses of any kind incurred in such defense beyond court
costs and attorneys' fees shall be borne by LICENSEE.
"10. DMRC further warrants that CHAVANOZ has agreed that, if
for any reason the exclusive license granted DMRC by CHAVANOZ and referred
to above is terminated, the present use license shall not be terminated
ipso facto but LICENSEE shall have the right and option to continue under
the terms of the present use license, except that CHAVANOZ shall succeed
to the rights and obligations of DMRC hereunder.
"11. LICENSEE shall have the right to terminate this license
and agreement five (5) years after the date of commencement of the first
fiscal year hereunder or on any anniversary thereafter by giving DMRC
sixty (60) days' notice in writing of such termination . . .
"13. In the event of termination or cancellation of this
agreement by operation of paragraphs 10, 11 or 12 hereof, LICENSEE agrees
to cease using the FT process and FT machines for the manufacture of
crimped yarn according to inventions which are the subject of the present
agreement, except that LICENSEE shall have the right to complete any and
all contracts for the manufacture of said crimped yarn which it may then
have upon its books or for which it has become obligated . . .
In the event of termination or cancellation of this agreement,
LICENSEE shall not use or disclose the technical information furnished
hereunder except as such information is published or otherwise made
available to the public through other sources, and LICENSEE shall deliver
to DMRC within ninety (90) days after the date of such termination or
cancellation all written or printed material in LICENSEE's possession
relating to the FT process or FT machines of this agreement, whether or
not such written or printed material was furnished to LICENSEE by DMRC,
and including all copies of instructions, drawings, photographs, and the
"14. LICENSEE acknowledges the validity of any patents issued
or which may issue on applications as aforesaid, and agrees that it will
not contest the same or be a party directly or indirectly to any
proceeding disputing such validity or tending to impair the value of FT
PATENT RIGHTS or by which the enjoyment of full revenue therefrom by DMRC
may be reduced.
From the outset of the DMRC licensing program in the United States
DMRC and Whitin actively cooperated in compelling compliance with the use
license requirement, and this cooperation was continued by ARCT, Inc.,
when it took over the sales of the ARCT machines in this country.
DMRC took such measures as threatening to embargo the shipment of
ARCT machines to the United States in an effort to prevent the delivery of
machines to non-licensed Throwsters.
The procedures which had been established during the Whitin period
continued essentially unchanged by ARCT, Inc., until after the
commencement of this litigation. Although
there were some isolated instances in which machines were delivered prior
to the execution by the purchaser of the use license, Waters never told a
customer or prospective customer that it was not necessary to sign the
DMRC license or that he would deliver a machine if the agreement was not
ARCT-France through its chief executive officer, Henri Crouzet,
also continued to cooperate with Chavanoz and DMRC in the use licensing
program. As late as February,
1970, Crouzet wired Armitage of DMRC:
". . . It has never been in our intention nor Bob Waters' to deliver
machines to your customers without signature of a license . . .
The agreement given to Bob Waters is to sell at the present
conditions up to end of February tothe new customers who would have taken
towards ARCT the binding of signing a license with you . . . The license
will always been (sic) regularized before delivery of the machines . .
." (PX 539).
And in March of 1970 Crouzet wrote to deMoncuit of Chavanoz:
"Pursuant to Article 8 of the agreement of 7/18/62 we
refrained from and prohibited our affiliate, ARCT, Inc., from selling
false twist machines to American customers who have not taken a license
with DMRC." (PX 212).
The result of this concert of action between the defendants was
that at the time of the institution of this litigation there was no ARCT
FT machine in commercial operation in the United States by an unlicensed
Because the requirement that the machines be sold only to use
licensees was a disadvantage to Whitin and ARCT, Inc. in making sales, the
cooperation of Robert Waters in the DMRC licensing program while he was
sales manager for Whitin and later when he became executive vice president
of ARCT, Inc. was tinged with some reluctance.
As shown in more detail in the proposed findings of fact of ARCT,
Inc., Nos. 51-52 adopted below, this eventually led to a deterioration of
the relationship between Waters, whose sole interest was in selling
machines, and Norman Armitage of DMRC, whose sole interest was in
licensing the machines and collecting royalties. Finally in late August, 1970, long after this litigation had
been pending, ARCT, Inc., added a disclaimer paragraph to its sales
contracts reading as follows:
"There is no warranty, express or implied, that the sale,
delivery or use of the FT machine provided for in this contract does not
infringe patents owned by third parties.
A use license under certain patents covering this machine may be
obtained from Deering Milliken Research Corporation."
Thereafter ARCT, Inc., sold the machines without regard to whether
the customer had signed a use license, and no new purchaser has since
signed a DMRC use license.
In addition to the foregoing findings of fact with respect to the
alleged vertical conspiracy the court expressly adopts as its own the
following proposed findings of fact submitted by the parties:
1. Plaintiffs' proposed findings of fact on the antitrust issues
Nos. 14.40, 14.43, 14.46, 14.51, 14.56, 14.59, 14.60, 14.61, 14.64, 14.66,
14.80, 14.81 and 14.82.
2. Chavanoz, DMRC and DMI proposed findings of fact on the
antitrust issues under Section I, Nos. 1-9 inclusive, 11, 12, 20-23
inclusive, 29, 33, 72 and 73.
3. ARCT-France's proposed findings of fact Nos. 7-12 inclusive, 16,
17, 24, 25, 27 and 30-33 inclusive.
4. ARCT, Inc.'s proposed findings of fact Nos. 50, 51 (with the
exception of the last paragraph) and 52.
While the foregoing facts relating to the alleged vertical
conspiracy are not in serious dispute, the legal conclusions drawn by the
opposing parties from these facts are in diametric contradiction.
The plaintiffs have confidently asserted that they have established
by a preponderance of the evidence per se and other violations of Section
1 of the Sherman Act while the defendants with equal confidence have
contended to the contrary, asserting that the facts establish only that
the defendants have exercised lawful rights granted them under the patent
Section 1 of the Sherman Act (15 U.S.C. s 1) provides in pertinent part:
"Every contract, combination in the form of trust or
otherwise, or conspiracy, in restraint of trade or commerce among the
several States, or with foreign nations, is declared to be illegal . .
Section 2 of the Sherman Act (15 U.S.C. s 2) makes liable:
"Every person who shall monopolize, or attempt to monopolize,
or combine or conspire with any other person or persons, to monopolize any
part of the trade or commerce among the several States, or with foreign
nations . . ."
Plaintiffs' position may be briefly summarized as follows:
(1) Chavanoz's license to ARCT-France and its sale of the machines
exhausted the patent monopoly and gave all subsequent purchasers of the
machines an implied license to use them without further payment of
(2) The Chavanoz-ARCT-France agreements required ARCT-France to
assign to Chavanoz ("grant-back") patent rights in all
(3) Chavanoz and DMRC conspired to fix the price of the ARCT
machines through the use royalties exacted from the Throwster purchasers;
(4) Chavanoz and DMRC conspired to tie the purchase of the machines
to the purchase of a compulsory package license covering unpatented
"technical information" and technology and a large number of
patents most of which were not applicable to the machines.
These charges will now be considered seriatim.
The Exhaustion-Implied License Theory
Plaintiffs do not deny that the rights inuring to a patentee under
Section 154 of the patent laws, 35 U.S.C. s 154, to exclude others from
making, using or selling a patented invention may lawfully be assigned or
licensed separately under Section 261, 35 U.S.C. s 261, and that the
patentee is entitled to a monetary reward for any one or all three of such
rights. Plaintiffs earnestly
contend, however, that Chavanoz failed to achieve its apparent purpose in
this case with the result that the sale of the ARCT machines, first to
Whitin and later to ARCT, Inc., exhausted the patent monopoly and that
upon resale of the machines the purchasers acquired an implied right to
use them without payment of a use royalty to Chavanoz or its sublicensee,
DMRC. From this premise it is
argued that the restriction on the resale of the machines to DMRC
licensees was a restraint on trade which constituted a per se violation of
Section 1 of the Sherman Act under United States v. Arnold, Schwinn and
Company, 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249 (1967).
In support of their argument that the exhaustion doctrine is
applicable here plaintiffs point to the absence of any express reservation
of use rights in the 1954 agreement. This agreement gave ARCT-France, so the argument goes, the
unlimited right to sell the machines free and clear of any use rights
later claimed by Chavanoz to have been retained, and notwithstanding all
purchasers of the machines in the United States fully understood that use
royalties were payable, and were in fact paid prior to the institution of
this litigation, the purchasers were under no legal obligation to do so. Settled principles of contract and patent law impel a
The general rules of construction for contracts are applicable to
the construction of patent licenses. De Stubner v. United Carbon Company,67 F.Supp. 884, 891
(S.D.W.Va.1946), aff'd, 163 F.2d 735 (4th Cir. 1947); Baldwin Rubber
Company v. Paine & Williams Company, 107 F.2d 350 (6th Cir. 1939).
The construction placed on a license contract by the parties is
entitled to great weight. Limbershaft Sales Corporation v. A. G. Spalding &
Brothers, 111 F.2d 675 (2nd Cir. 1940).
And, of course, a license contract must be construed as a whole and
the intention of the parties must be determined from the entire agreement.
Victory Bottle Capping Machine Company v. O. & J. Machinery
Company, 280 F. 753, 759 (1st Cir. 1922).
None of the agreements between Chavanoz and ARCT-France expressly
reserved to Chavanoz the use rights in machines to be built embodying the
Chavanoz inventions, and sales were only limited by the 1954 agreement to
licensees of the HELANCA process. Nothing
was said of the right of those licensees to use the machines following
purchase.[FN6] The 1957
Chavanoz- DMRC agreement, however, obligated Chavanoz "to direct ARCT
. . . to sell or deliver FT
machines in the United States . . . only
to parties sublicensed by DMRC to use the machines . . ."
In 1954 Chavanoz owned no United States patents, and we need not ponder
the question of whether the sale of a machine by ARCT-France in this
country prior to the 1957 Chavanoz-DMRC agreement to a purchaser not
licensed under the HELANCA process would have carried with it an implied
right to use the machine, for in fact no such sales were made.
The record is not clear as to how Chavanoz undertook to discharge
this obligation, but without question ARCT-France and its affiliates in
the United States, first Witin and later ARCT, Inc., faithfully adhered to
the directive which Chavanoz doubtless gave, and no sales or deliveries
were made to purchasers in the United States who did not at the time of
the sale or shortly thereafter sign a DMRC use license.
It must be assumed, therefore, that ARCT- France accepted this
obligation as an amendment to its 1954 agreement with Chavanoz.
The 1962 agreement which consolidated "in a comprehensive
instrument" the 1954 agreement and a "number of verbal
agreements" contained an express prohibition against the delivery of
the machines by ARCT-France to non- licensed users.
In the meantime a similar prohibition had been incorporated in the
1959 agreement between ARCT-France and Whitin.
Even if there had been no express limitation on ARCT-France's right
to sell and deliver to non-licensed users, such term may be implied from
the conduct of the parties.
"Terms may be implied in a contract, not because they are
reasonable, but because they are necessarily involved in the contractual
relationship so that the parties must have intended but failed to
specifically include them because of their obviousness. Where, from the
nature of a contract and the circumstances under which made, it is
apparent the parties must have proceeded on the basis that certain
conditions existed, without which its performance would be unnecessary,
the existence of such conditions will be regarded as implied terms of the
Navigation Company v. Salz, 273 U.S. 326, 329 (47 S.Ct. 368, 71 L.Ed.
663); Wheeling & L. E. R. Company v. Carpenter, 218 F. 273 (CCA
6)." Baldwin Rubber Company v. Paine & Williams Company, 107 F.2d
350, 353 (6th Cir. 1939).
Plaintiffs cite the intermediate sales by ARCT-France to Whitin and
ARCT, Inc., as further evidence in support of their exhaustion argument,
but in the court's view these sales did not serve to free the machines
from the use right restriction any more than if the plaintiffs had
purchased directly from ARCT-France. In either case, they would have purchased from a party who
had nouse rights in the machines, a fact well known to all concerned.
Thus the sales remained conditional under the patent laws.
Since ARCT-France's right to manufacture and sell the machines was
a contractually-limited one, the use rights were effectively reserved and
Chavanoz and DMRC had the right to license the use of the machines
separately from their manufacture and sale, Brulotte v. Thys Company, 379
U.S. 29, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964); General Talking Pictures
Corporation v. Western Electric Company, 304 U.S. 175, 58 S.Ct. 849, 82
L.Ed. 1273 (1938); In Re Yarn Processing Patent Validity Litigation, 541
F.2d 1127 (5th Cir. 1976); Extractol Process, Ltd. v. Hiram Walker &
Sons, Inc., 153 F.2d 264 (7th Cir. 1946).
In the Schwinn case, so heavily relied on by plaintiffs, the
Supreme Court extended the per se doctrine to cover restrictions imposed
by a vendor on the resale by a distributor of unpatented merchandise as to
which the vendor had surrendered title, dominion and control.
The plaintiffs have cited no case, however, and the court has found
none, extending Schwinn to a restriction imposed by a patentee in the
lawful exercise of his patent monopoly rights. [FN7]
Having concluded that the sales by ARCT-France did not exhaust the
patent monopoly, the court declines to apply the Schwinn doctrine to the
facts of this case.
Referring to the right to reserve control over a product as to which a
manufacturer has parted dominion or transferred risk of loss to another,
the court in Schwinn said in Footnote 6: "We have no occasion here to
consider whether a patentee has any greater rights in this respect."
388 U.S. at p. 379, 87 S.Ct. at p. 1865.
The parties in this case, as have the courts and scholars in cases
and commentaries following Schwinn, have debated the meaning of this
rather ambiguous statement. See an interesting discussion of this subject
in Vertical Restraints on Patented Products and Schwinn: The Case For a
Rule of Reason Approach, 43 George Washington Law Review 239, 251-252
The Grant-Back Clause
Covenants in a license requiring the licensee to assign or license
any improvements he may make to the patentee, commonly referred to as
"grant- backs", are not as such inherently illegal.
Transparent-Wrap Machine Corporation v. Stokes-Smith Company, 329 U.S.
637, 67 S.Ct. 610, 91 L.Ed. 563 (1947).
Plaintiffs contend, however, that the contractual obligation of
ARCT- France to assign to Chavanoz all rights in improvements in the
"patent field" as defined in paragraph 1 of the 1962 agreement
"far exceeds the scope and form of grant-back obligation exempted
from the per se rule in (Transparent- Wrap )", and constituted a per
se violation of Section 1 of the Sherman Act as well as an unreasonable
restraint on trade under that statute.
Because the scope of the improvements required to be granted back
by ARCT-France extended substantially beyond the scope of Chavanoz's
original patents, the question here is a close one, but the court has
concluded that the grant-back clause did not in this instance offend the
antitrust laws. Considerations leading to this determination include the
1. The grant-back had no adverse effect on competition in the
manufacture of false twist machinery.
Neither Chavanoz nor DMRC manufactured machinery, and ARCT-France's
principal competitor in the United States, Leesona, was not affected by
this grant-back arrangement between Chavanoz and ARCT-France.
2. ARCT-France was the only manufacturing licensee involved in the
grant-back arrangement, and it was free to incorporate its own inventions
in its machines without payment of further royalties to Chavanoz.
Since all ARCT machines sold in this country included at least two
inventions patented initially to Chavanoz in its own right (DX 628), the
plaintiff use licensees were under a continuing obligation to pay the
level royalty rate established by Chavanoz and DMRC.
When new improvements were developed and incorporated in the
machines they were made available to plaintiffs without any increase in
this fixed royalty rate. Thus
the plaintiffs were not harmed by the grant-back arrangement.
3. Invention by ARCT-France was not discouraged by the grant-back
clause. Of the twenty-two
patents originally in suit here twelve were developed by ARCT- France and
assigned back to Chavanoz. Its
research and development efforts obviously were not stifled by the
In the early DMRC standard use license form there was incorporated
a grant- back clause applicable to DMRC's use licensees, the plaintiffs in
this case, but this provision was deleted in 1961 following an amendment
to the Chavanoz- DMRC agreement. The
questions raised by the several grant-back clauses which continued to
appear in the Chavanoz-ARCT-France agreements will be re-examined under
the patent misuse section of this memorandum, but at this point the court
is of opinion that the requirement that ARCT-France assign back to
Chavanoz all improvements it might make in the "patent field"
did not rise to the level of an antitrust violation.
The Price-Fixing Charge
In support of their position on the price-fixing charge plaintiffs
argue that the amount of the royalty established by the agreement between
Chavanoz and DMRC which the licensees were to pay, and which DMRC
consistently maintained was non-negotiable, constituted a part of the
sales price of the machines. The
fixing of this portion of the price paid by the Throwsters, the plaintiffs
contend, constituted a per se violation of Section 1 of the Sherman Act.
Here again we find the plaintiffs relying on the assumption that
the sale by ARCT-France of the machines exhausted the patent monopoly and
carried with it an implied license to use the machines without payment of
royalties. Since the court
has been unable to accept this argument, the charge of price-fixing must
be examined in the light of the unquestioned right of a patentee "to
exact royalties as high as he can negotiate within the leverage of that
monopoly." Brulotte v. Thys Company, 379 U.S. 29, 33, 85 S.Ct. 176,
179, 13 L.Ed.2d 99 (1964).
Plaintiffs' reliance on such cases as Ethyl Gasoline Corporation v.
United States, 309 U.S. 436, 60 S.Ct. 618, 84 L.Ed. 852 (1940), and United
States v. Univis Lens Company, 316 U.S. 241, 62 S.Ct. 1088, 86 L.Ed. 1408
(1942), is misplaced. In each
of those cases the patentee had licensed a manufacturer to make and sell
the patented product but had reserved the use rights to itself. The
patentee had then issued use licenses to wholesalers and retailers, and in
each license had set the price at which that party could sell to the next
party in the chain. Therefore,
on the purported basis of a retained use license, the patentees had set
the price paid by the first wholesaler to the manufacturer, by the first
retailer to the wholesaler and by the public to the retailer.
The holding in these cases is simply that the Sherman Act prohibits
the use of a patent monopoly to fix the resale price once the product has
passed into the hands of a purchaser from a manufacturing licensee.
They in no way impose a restriction on the amount a patentee may
set as the purchase price for his invention or the amount he may exact as
a royalty for its use. Eastern
Venetian Blind Company v. Acme Steel Company, 188 F.2d 247, 253 (4th Cir.
In Re Yarn Processing Patent Validity Litigation, 541 F.2d 1127
(5th Cir. 1976), another case relied on by plaintiffs, is also
distinguishable. In that case
the patentee, Leesona, licensed other manufacturers to make and sell
machines incorporating its patents but reserved the right to charge the
purchasers a production royalty one-third of which was shared with its
competitor manufacturers. The Fifth Circuit held that the sales price of
the machinery consisted of two elements, the initial price and the royalty
payments, and that since the royalty rate was not negotiable by the
manufacturers, this portion of the purchase price of the machinery was
fixed. A finding by the
district court of violations of Sections 1 and 2 of the Sherman Act was
affirmed. The court said:
"A patentee may usually exact whatever royalty it wishes.
But, Leesona and Permatwist elected to take a one-third reduction
in their royalty income. There is nothing in the patent laws that allows
them to decide unilaterally that the machine manufacturers would get the
entire benefit of their own royalty reduction.
By allocating this benefit, Leesona guaranteed income to the
manufacturers and effectively fixed the price of the machinery.
The machinery manufacturers who participated in the scheme were
protected against free competition and free bargaining in effecting their
sales to throwsters." 541 F.2d at p. 1136.
Although this court is inclined to agree with the plaintiffs that
the royalties paid by them to DMRC constituted in effect a part of the
purchase price for the machines, the royalties were not shared with a
manufacturer but were simply retained by Chavanoz and its licensing agent,
DMRC, as the patentee's reward for its patented inventions.
The court concludes that the plaintiffs' price-fixing charge has
not been established.
Plaintiffs strongly urge that the defendants conspired to impose on
them a tying arrangement which constituted a per se violation of Section 1
of the Sherman Act. More
specifically, they contend that as a result of the requirement that they
take the DMRC use license, patents and unpatented technical information
were tied to the machines and non-applicable patents and unpatented
technical information were tied to other patents.
Although the facts on which plaintiffs' contentions are based may
be seen later to justify a finding of patent misuse, in the court's view
they do not support the conclusion that the tying arrangement violated the
A tying arrangement is an agreement by a party to sell one product
(the tying product) but only on condition that the buyer also purchase a
different (or tied) product. Illegality
under the tying cases is established when it is shown that the antitrust
defendant has sufficient market power with respect to the tying product to
restrain free competition in the market for the tied product and a not
insubstantial amount of commerce in the tied product is affected by the
arrangement. Kentucky Fried
Chicken v. Diversified Packaging, 549 F.2d 368 (5th Cir. 1977); Advance
Business System & Supply Company v. SCM Corporation, 415 F.2d 55 (4th
Cir. 1969); Donlan v. Carvel, 209 F.Supp. 829 (D.Md.1962).
When the tying product is patented sufficient market power to
enforce a tie-in is presumed. United
States v. Loew's, Inc., 371 U.S. 38, 83 S.Ct. 97, 9 L.Ed.2d 11 (1962).
By the same token when the patent itself is employed as the tying
"product" the power of the patentee to require a licensee to
purchase a different product is unquestioned.
Although the ARCT machines as such were not patented, a rapid
growth in their sales was experienced almost from the beginning, and for
present purposes the court has assumed that both with respect to the
patents and the machines the defendants possessed sufficient economic
power in the tying products to enforce the alleged tie-ins at all times.
Attention need therefore be focused only on the question of whether a
substantial amount of commerce in the tied property was affected by the
tying arrangement. This in
turn involves identification of the tied product.
Plaintiffs assert that the patents themselves and certain
information" were tied products that they were tied to the machines
and that plaintiffs were required to take a license under all of the
Chavanoz patents (regardless of their applicability to the machines) and
the unpatented technical information in order to get the machines.[FN8]
The exact meaning of "technical information" as used here
remains something of a mystery. In
a letter to a Throwster's attorney dated April 22, 1961, Armitage of DMRC
"The machine itself contains structural and functional
elements, some of which are the subject of patents and patent applications
and some of which are included in the technical information which is made
available to the purchaser of the machine, and this also applies to the
process under which the licensee is licensed.
As far as the machine is concerned, ARCT, the licensed
manufacturer, is not permitted to make available such embodiments of the
technical information except to licensees for their use." But there
was never any doubt that in order to get the machines a purchaser had to
sign a license. In the same
letter Armitage continued:
"In order to get the machine in the first place from the
foreign licensed manufacturer, the purchaser agrees to pay this continuing
royalty under the license for its use."
Plaintiffs further complain that when the patents actually applied
to the machines are considered as the tying products, this same technical
information and many non-applicable patents were tied to them.
The tied products are thus identified as the unpatented technical
information and certain patents which admittedly were never applicable to
any of the machines purchased by the plaintiffs.
The question thus becomes: Was a substantial amount of commerce in
these tied products affected by the tying arrangement?
The answer must be in the negative.
The rationale underlying the rule in the tying arrangement cases is
"(Tying agreements) deny competitors free access to the market
for the tied product, not because the party imposing the tying
requirements has a better product or a lower price but because of his
power or leverage in another market. At the same time buyers are forced to forego their free
choice between competing products."
Northern Pacific R. Company v. United States, 356 U.S. 1, 6, 78
S.Ct. 514, 518, 2 L.Ed.2d 545 (1958).
Such is notthe case here. The only serious competitor of the defendants at the time
DMRC's licensing program began was Leesona. Like ARCT, it was in the
business of selling yarn texturing machinery embodying its own patents,
and except as it was able to sell these machines to the plaintiff
Throwsters there was obviously no market among them for its own patents
whether adaptable to the ARCT machines or not.
Even if Leesona had possessed its own brand of the nebulous
"technical information", as to which the record is silent, it is
not readily apparent how it would have been of any use to the purchasers
of ARCT machines. It follows
that the plaintiffs were not forced to forego their free choice between
competing products for there were none.
". . . Unless a defendant can establish certain narrow affirmative
defenses, a finding that the defendant's conduct falls within the category
of per se tying arrangements disposes of the case in the plaintiff's
"Here, as elsewhere, however, the per se label can sometimes
prove misleading. Per se analysis is susceptible to the unwarranted inference
that a plaintiff prevails in a tying case merely by finding some way to
characterize the defendant's conduct as a tie . . .
To bring a defendant's conduct within the category of ties that are
per se violations of the Sherman Act, however, a plaintiff must go beyond
some colorable characterization of the arrangement as fitting this rough
"A plaintiff must show that the challenged arrangement is in
fact a tie: that two separate products are involved and that, in addition
to complying with the literal terms of the imprecise definition, the
seller's behavior follows the general pattern found unacceptable in the
earlier tying cases. To
measure an arrangement against that general pattern we must take into
account the principal evils of tie-ins: they may foreclose the tying
party's competitors from a segment of the tied product market, and they
may deprive the tie's victims of the advantages of shopping around . .
." Kentucky Fried
Chicken v. Diversified Packaging Corporation, 549 F.2d 368, 375 (5th Cir.
In summary, although the defendants possessed sufficient market
power with respect to the tying products to restrain free competition in
the market for the tied products if such market had existed, there was no
such market and no commerce in the tied product was affected by the
Manufacturing Co. v. Cline, 427 F.Supp. 78 (C.D.Cal.1976).
The court therefore fails to find an antitrust violation in the
tying arrangement charged here.
Some of plaintiff's charges in connection with the alleged vertical
conspiracy will be re-examined later in the section of the memorandum on
misuse of patents, but at this point the court concludes that these
charges have not been established as antitrust violations.
B. The Horizontal Conspiracy
Plaintiffs' allegations of conspiratorial conduct of the defendants
and their principal competitor, Leesona, which led to the settlement in
1964 of certain patent litigation then pending between Leesona and the
defendants will now be considered. Here
again we find the facts are not in substantial dispute, but the parties
are poles apart in their interpretation of the facts and their contentions
as to the legal significance to be given them.
Plaintiffs contend the settlement was the result of a conspiracy
between Leesona and the defendants to preserve and perpetuate their
established production royalty licensing programs in which the royalties
charged their licensees were virtually identical and not subject to
reduction; that this constituted price-fixing in violation of Section 1 of
the Sherman Act; and that defendants also conspired to monopolize the
false twist machinery industry in violation of Section 2 of the Sherman
Act. The defendants deny any
wrongdoing and with equal fervor contend that the settlement of this
"dangerous litigation" was the result of good faith, arms-length
bargaining by the adversary parties all of whom were exercising sound,
reasonable and lawful business judgment.
The agreement between Chavanoz and DMRC for the licensing in the
United States of the ARCT machines was signed on December 31, 1957. At
that time the only manufacturer of false twist machines in the American
market was Leesona which had begun developing a continuous process false
twist machine in the early 1950's and which it began to market in late
1954. This was the Leesona
Model 550 or Superloft machine.
Meanwhile, the Permatwist partnership had begun building and
marketing attachments for converting conventional textile texturing
machines to produce crimped yarns by false twisting.
Permatwist filed three patent applications in January, 1954
covering its machine and process which it was marketing under the
In December, 1954, Leesona and Permatwist entered into an agreement
whereby Leesona acquired the pending Permatwist patent applications which
eventually matured into United States Patents Nos. 2,803,105, 2,803,108
and 2,803,109, all of which were issued on August 20, 1957.
In this agreement Leesona acquired the rights to other related
inventions and future improvements as well as Permatwist's rights under
its outstanding license agreements covering the Fluflon machines
previously sold. In return
Permatwist was to receive a share of all royalties collected by Leesona
and a portion of the selling price of Leesona's false twist machinery.
Thereafter Leesona marketed both the Fluflon machinery and its own
In the inception the Leesona-Permatwist agreement did not require a
production royalty to be charged on the Superloft machines, but purchasers
were required to take a license under the Permatwist patent applications,
and the Fluflon attachments were continued to be sold on a production
royalty basis. In early 1957
when Leesona began marketing its Model 511 or "Saaba" attachment
for use in post-treating stretch yarns produced by the false twist
process, purchasers, although required to sign a license agreement, were
not required to pay a continuing production royalty.
When Chavanoz and DMRC began to consider introducing the ARCT
machinery into the United States under a continuing production royalty
license Leesona's Superloft machine was the only integrated false twist
machine then being sold in the United States.
Chavanoz and DMRC recognized that since the Superloft was being
sold on a royalty-free basis, it would seriously affect their proposed
production royalty program. Recognizing
this threat from the Leesona competition DMRC and Chavanoz had inserted in
their 1957 agreement a provision that the production royalty to be charged
purchasers of the ARCT machinery would be five per cent of the
manufacturer's list price of the raw yarn processed on the machines but
that if there were "substantial unlicensed competition" DMRC
could adjust the rate to as low as two and one-half per cent, and in view
of the continuing sale of the Leesona machines on a royalty-free basis
this was the royalty figure charged the DMRC licensees from the beginning.
In an effort to solve this unlicensed competition problem Chavanoz
notified Leesona at a time when its dealings with DMRC were still in the
negotiation stage that the Superloft machine infringed one or more of the
Chavanoz false twist patent applications and suggested that Leesona should
take a license under the Chavanoz patents. Leesona declined these
suggestions, but Chavanoz never went so far as to threaten Leesona with
litigation based upon its allegedinfringement of any Chavanoz patent, and
in fact the Chavanoz patents have never been asserted against the Leesona
machines in this country.[FN9]
In February, 1959, Chavanoz sued Leesona in France, claiming that the sale
and use of the Superloft machines in that country infringed three Chavanoz
patents which were the counterparts of its United States Patents Nos.
2,741,893, 2,761,272 and 2,780,047. This
suit was included in the litigation settled in this country in 1964.
The next approach adopted by Chavanoz and DMRC was the institution
in November, 1957, by DMRC of an action in the United States District
Court for the Eastern District of New York (the "Brooklyn
litigation") in which DMRC undertook to obtain the Leesona false
twist patents for itself. The
complaint was based on the grant-back provisions in an earlier contract
between DMRC and Leesona relating to DMRC's edge-crimping
("Agilon") process. Had
this suit been successful, DMRC would have been able to bring the Leesona
patents under the Chavanoz-DMRC licensing program then being negotiated,
and the elimination of this unlicensed competition would have permitted
establishment of the DMRC royalty rate at 5%, the maximum rate fixed by
the Chavanoz-DMRC agreement.
Leesona eventually won the suit, Deering Milliken Research
Corporation v. Leesona Corporation, 201 F.Supp. 776 (E.D.N.Y.1962), aff'd,
315 F.2d 475 (2nd Cir. 1963), but in the meantime its outcome had been
rendered irrelevant by another development.
Prior to the sale of the first ARCT machine in the United States
Leesona instituted a new production royalty program of its own, and this
cleared the way for Chavanoz and DMRC to do likewise.
Leesona's new program followed shortly after its development of a
high-speed spindle which greatly increased the spindle speed of its false
twist machines. Under its new
program Leesona required purchasers of its false twist machines
incorporating its new high speed spindles to sign a license agreement
providing for a production royalty of 6 cents per pound on 70 denier
yarn.[FN10] Leesona thereafter applied the same basic royalty schedule to
its later model machines.
Denier is a unit of weight for yarns of all materials, natural and
synthetic, equal to .05 gram per 450 meters. From
1957 and continuing into the late 1960's 70 denier nylon yarn constituted
a major portion of the yarn being processed on false twist machines.
DMRC received a copy of Leesona's new license agreement on or
before October 10, 1958, which was shortly after the decision to implement
the licensing program had been made, and this decision was embodied in a
modification of the Leesona-Permatwist agreement on October 17, 1958.
Although it had not licensed any purchasers of the ARCT machines at
that time, DMRC did not move immediately to bring its royalty rate in line
The initial DMRC royalty of 21/2% Of the manufacturer's published list
price for raw yarn worked out to approximately 41/2 cents per pound for 70
denier nylon based on the then prevailing list price of $1.71 per pound.
This list price remained in effect for ten years or more
Sales of the ARCT machines by Whitin in the United States began in
1959, and on April 1, 1960, Leesona instituted an action in the United
States District Court for the Western District of South Carolina against
the Judson Mills Division of Cotwool Manufacturing Company (a corporate
predecessor of DMI) for infringement of the three patents which it had
obtained from the Permatwist applications (the '105, '108 and '109
patents) allegedly resulting from Judson's use of its ARCT machines (the
"Cotwool litigation"). Shortly
thereafter there was instituted in the name of Whitin against Leesona in
the United States District Court for the District of Massachusetts a suit
for a declaratory judgment that the three Leesona false twist patents were
invalid, unenforceable and not infringed by the use of ARCT false twist
machines (the "Whitin litigation").
Chavanoz and DMRC were the guiding hands behind the institution and
prosecution of this suit in Massachusetts.
In November, 1961, Leesona also began an arbitration proceeding
against Schwarzenbach-Huber, one of the plaintiffs herein, which was
licensed both by Leesona and DMRC, in which Leesona attempted to collect
royalties under its license by reason of Schwarzenbach-Huber's operation
of its ARCT machines. Under its licensing agreement DMRC was obliged to
defend this arbitration proceeding.
Other legal confrontations between DMRC and Leesona occurred in the
United States Patent Office where DMRC undertook through interferences
with Leesona to gain control of Leesona's 108 patent and its post-treating
Saaba patent No. 2,864,229.
Shortly after the institution of the Cotwool and Whitin
litigations, Warren A. Seem, one of the Permatwist partners, wrote to
Armitage of DMRC on December 27, 1960 and suggested that negotiations
looking to a settlement of the controversies then pending in "three
different arenas" should be undertaken.
"(W)e propose that instead of slugging it out in the public
square, we join hands and do something good for the industry as well as
"(T)he opponents are now engaged in licensing identical
processes requiring endless patent litigation.
To us it looks like both sides are bound and determined to destroy
each other and harm the industry they both desire to serve.
"However, being quite familiar with both sides, either by
personal contact or reputation, we do not have the slightest doubt that
all differences can be settled at the conference table and to the mutual
advantage of all concerned. As unauthorized intermediaries, we would like
to know whether you are willing to give the conference table another
try." (DX 136).
Shortly thereafter meetings were held in early 1961 at which
proposals were advanced for settling the Cotwool, Whitin and Brooklyn
litigations and the patent interferences.
Leesona proposed that DMRC take a Leesona standard manufacturer's
license under the terms of which DMRC would receive one-third of the
royalties collected. DMRC
proposed that the Cotwool and Whitin suits be dismissed with admissions
only of the validity of the Leesona patents.
During the first meeting Davis of Leesona and Seem confirmed to
Armitage of DMRC that the Leesona royalty on 70 denier yarn was 6 cents
Meanwhile Leesona continued to license other potential competitors
in the false twist manufacturing field by sharing one-third of its
royalties with them in return for a license to sell false twist machines
only to Leesona's licensees. Unlike normal license arrangements, these competing
manufacturers, eventually about thirteen in all, paid Leesona nothing for
their freedom from its infringement claims but instead were rewarded by a
share of the royalties collected by Leesona.[FN12]
In the same year the present litigation was instituted, 1969, Leesona
became the defendant in numerous actions brought by purchasers of its
false twist machinery challenging the validity of the Leesona patents and
asserting antitrust claims. Several
of the plaintiffs in the present litigation were parties plaintiff to
those actions which were finally consolidated in the United States
District Court for the Southern District of Florida and assigned to the
Honorable Clyde Atkins, United States District Judge.
In an order of July 11, 1974, Judge Atkins granted summary judgment
holding the manufacturing license agreements mentioned herein which
Leesona had signed with the various machinery manufacturers to be in
violation of Sections 1 and 2 of the Sherman Act.
This decision was affirmed by the United States Court of Appeals
for the Fifth Circuit on November 5, 1976.
In Re Yarn Processing Patent Validity Litigation, 541 F.2d 1127,
rehearing and rehearing en banc denied, February 3, 1977 (cert. denied,
Lex. Tex. L.T.D., Inc. v. Universal Textured Yarns Inc., --- U.S. ----, 97
S.Ct. 2976, 53 L.Ed.2d 1094 (1977)).
Although as previously noted this case is not regarded as
controlling on the price- fixing aspect of the alleged vertical
conspiracy, it is considered, as will be seen, to be highly germane to the
alleged horizontal conspiracy.
In March of 1961 Leo Soep, representing Chavanoz, Warren Seem, the
Permatwist partner, and Robert Conrad, counsel for Leesona, had a
conference in London concerning false twist matters, and during the course
of their discussions Soep suggested terms upon which the United States
litigation might be settled. Reporting on this conference to Armitage,
"As you will remember the DMRC/Chavanoz agreement provides for
a royalty reduced to one-half its amount as long as there is substantial
"Suppose an agreement is reached with Leesona whereby mutual
cross-licensing takes place with the promise of non-assertion of clients,
then DMRC will be entitled to increase the rate, and we can consider a
split of the increased rate between the three of us.
"Conrad is interested in this proposal but mentioned that he
would like an overall arrangement with DMRC . . .
"I do not mind to tie in the Chavanoz problems with the
specific DMRC ones if necessary, but I feel that this is not entirely the
case. However if it serves
your interest, I do not mind." (PX 1043).
The Soep proposal met with strong objection by Waters of Whitin who
could see only a doubling of the DMRC royalty rate while the Leesona rate
remained the same thus making it more difficult for him to sell the ARCT
machines in the face of the Leesona competition. And, of course, since
Whitin did not share in the production royalties in any event, there was
nothing in the Soep proposition for Whitin.
Apparently nothing came of the 1961 settlement discussions, and
between 1961 and 1963 the record reflects no further formal settlement
negotiations. During this
period the Cotwool litigation was consolidated with the Whitin litigation
in the District of Massachusetts over Leesona's strong objection, and the
Schwarzenbach-Huber arbitration proceeding was stayed from March, 1961,
until April, 1963.
On May 21, 1963, Albert Davis, house counsel for Leesona on patent
matters, and Soep met in Paris to discuss the possibility of settling both
the United States and French litigations, and Soep's memorandum of the
conference made the following day indicates that Davis renewed Leesona's
previous proposal that it grant to Chavanoz and its affiliates a license
to manufacture and sell false twist machinery to Leesona's licensees and
that Leesona's standard license agreement be modified to the extent
necessary to make it applicable to users of the ARCT machines.
The royalty rate would continue at 6 cents per pound for 70 denier
yarn and Leesona would pay Chavanoz and its affiliates one-third of the
royalties collected from the licensed users of the ARCT machines.
Soep further reported:
"Chavanoz having consulted DMRC, has obtained from this
company the agreement in principle to sharing royalties presently received
with Leesona. There are three variations possible:
"(a) DMRC reduces its royalties by a certain amount, Chavanoz
by a larger amount, and the total sum of this deducted royalty is paid by
DMRC and Chavanoz to Leesona in exchange for a hold harmless clause.
"(b) Chavanoz and DMRC pay an annual fixed royalty taken from
royalties received from their customers to Leesona against an exchange of
a hold harmless clause and
"(c) Chavanoz and DMRC pay a fixed sum in one payment to
Leesona against an exchange of a hold harmless clause.
"An intermediate solution has also been endeavored: Chavanoz
and Leesona pool their interests and form a non-profit joint association,
for the promotion of stretch yarn in the U.S.
This organization would do the showing of both type of machinery
produced by Leesona and by ARCT so that a reduction of promotion costs
would result to the benefit of Leesona and of Chavanoz.
"This solution should, however, be considered very carefully
from the angle of antitrust law."
Following the discussions between Davis and Soep there were
discussions between Davis and Whitin's house counsel, Ward Smith, in May
and June of 1963, which led to a conference between the principals on June
18, 1963, at the Algonquin Club in Boston.
At this meeting apparently neither side was willing to make any
substantial change in its previous negotiation position, and the
consequence was that the meeting broke up without much having been
accomplished toward settlement.
Prior to the Algonquin conference, however, there had been one
significant development on the DMRC side.
On June 12, 1963, despite the problems Whitin was having in selling
machines because of the pendency of the litigation, DMRC, Chavanoz and
Whitin agreed to raise the DMRC production royalty rate from 21/2% To
31/2%. This increase brought
the DMRC royalty rate in line with Leesona's with respect to 70 denier
nylon yarn since application of the new rate to the long-established list
price of $1.71 per pound for the raw yarn resulted in a charge of $.05985
per pound as against Leesona's 6 cents per pound. The new agreement provided that .6% Of the royalties to be
collected would go directly to DMRC and the remaining 2.9% Would go into
an escrow fund to be refunded to DMRC's new licensees in the event the
litigation with Leesona terminated adversely to Chavanoz and its
Following the Algonquin conference apparently no further settlement
discussions occurred between the adversaries until late 1963 when it
became known that the Cotwool and Whitin litigations which had been
consolidated would be scheduled for trial in Boston early in 1964.
However, the subject of settlement remained alive between Leesona
and the Permatwist partners whose interest would be affected by any
settlement because of their arrangement with Leesona.
In a memorandum of a conference with Permatwist on August 6, 1963,
Robert Leeson recorded that
"What we offer (Permatwist) is a good deal on any way of
looking at it. 1. Approx. 10%
On value of machine export, and 2. One-half
of royalty (illegible) and we do everything in our power to sell machines
so we can get (illegible) . 04 for both of us; and everything to settle so
that all competitors charge a royalty." (PX 353).
In December, 1963, Leesona was able through certain procedural
maneuvers to forestall an immediate trial of the case in Boston, and on
January 23, 1964, Armitage and Leeson had a further settlement conference.
Like its predecessors this conference resulted in an impasse,
Armitage maintaining the position that Leesona should accept a lump sum
settlement based on the estimated cost of continuing the litigation and
Leeson continuing to insist that the ARCT licensees be licensed under the
Leesona patents and that production royalties be divided two-thirds to
Leesona and one-third to DMRC/Chavanoz.
Reporting on this conference Leeson wrote that he told Armitage
". . . that he should ask Soep to reconsider his mathematics there
is more at stake than the cost of a suit.
If you win, you lose, and if you lose, you lose because if the
patent is broken, there will be no royalty."
Armitage thereafter reported this conference to Roger Milliken,
president and chief executive officer of the Deering Milliken enterprises,
and a few days later Milliken conferred with Leeson. This was followed by
another conference between Milliken and Leeson in February of 1964, and in
consequence of this second conference Armitage prepared and mailed to
Leeson a draft of a settlement proposal on March 3, 1964, which
incorporated Armitage's understanding of the conversations between
Milliken and Leeson.
Meanwhile, on February 28, 1964, a Canadian court had rendered a
decision upholding the Leesona patents in an action brought against
Leesona in Canada by the Scragg Company, a British manufacturer of false
twist machinery. There is no
evidence that this decision had been brought to the attention of Armitage
before he prepared the settlement draft sent to Leeson four days later,
and the court is satisfied that this proposed settlement draft was the
outgrowth of Milliken's conferences with Leeson and was in no way inspired
by the Canadian court's decision in the Scragg case.[FN13]
As a matter of fact there were findings in this Canadian case which would
have been favorable to DMRC's efforts to invalidate the Leesona patents
under Section 102 of the United States patent law, 35 U.S.C. s 102.
In the Canadian case it was to Leesona's interest that it establish
the earliest invention date possible for the Canadian counterparts of its
United States patents Nos. 105, 108 and 109, and it alleged that the
inventions embodied in those patents were in fact made in July 1947, a
position which the Canadian court in effect adopted.
In the Florida litigation, In Re Yarn Processing, supra, Judge
Atkins held Leesona collaterally estopped to assert to the contrary, and
he invalidated the United States patents on summary judgment in a decision
reported in 360 F.Supp. 74 (1973), which was later reversed in another
appeal, In Re Yarn Processing Patent Validity Litigation, 498 F.2d 271
(5th Cir. 1974).
Negotiations over the specific terms of the agreement continued
throughout March, 1964, and on March 20, 1964, Davis of Leesona mailed
Armitage a draft settlement agreement which contained the same basic
provisions as the agreement finally signed.
The parties mutually covenanted not to sue each other's licensees
and DMRC agreed to pay Leesona $150,000 out of future royalties, a figure
arrived at after Armitage had given Leeson an estimate of DMRC's projected
royalty income. In a recorded
telephone discussion of this draft agreement between Armitage and Davis on
March 24, 1964, it was agreed in view of its antitrust implications to
delete a provision which would have required DMRC to maintain its rate of
payments toward the $150,000 even if DMRC reduced its royalty rate.
Armitage explained to Davis that DMRC's only source of revenue was the
royalties and that if either side reduced royalties the other would have
to do so. Armitage went on to explain that "there is no reason for
us to reduce royalties unless you force us to do so", and Davis
agreed with this. Armitage
further stated that he would dislike to have anything in the agreement
"that looks like a penalty against reducing royalty rates because I
have in mind this antitrust thing."
Although the final settlement apparently was not agreed upon until
some time in April, four settlement agreement documents between defendants
and Leesona were signed as of March 31, 1964, the principal one with which
the present litigation is concerned being the one that settled all
existing litigation between the parties in the United States (PX 223, Tab
The agreement is in the form of an exchange of mutual
cross-covenants of the parties not to sue each other or customers of the
other under certain listed existing patents with respect to presently
existing and future machines and under specified existing patents as well
as future patents with respect to presently existing machines provided the
machines are licensed either by Leesona or Chavanoz.
Unlicensed machines receive no protection, and in his recorded
telephone conversation with Davis Armitage had stated ". . .
if they are not licensees we are not interested in what you do to
them and you are probably not interested in what we do to them . . ."
As consideration for the settlement DMRC agreed to pay Leesona 10%
Of the DMRC royalties collected until $150,000 had been paid. All of the litigation pending between the parties in the
United States was to be dismissed without prejudice with each side bearing
its own costs.
The actual terms of the settlement were not made public, but in a
jointly issued press release the out-of-court settlement of all stretch
yarn patent litigation previously pending between the parties was
announced. The press release
contained the statement that the settlement had followed "close on
the heels of the February 28, 1964 decision" of the Canadian court
upholding the validity of Leesona's stretch yarn patents in Canada (PX
343). Although factually accurate, this statement was misleading for that,
as previously stated, the court is satisfied that the Canadian court
decision was not a motivating factor in the settlement.
Further evidence that it was not is to be found in the fact that
instead of bolstering Leesona's bargaining position as might have been
expected, the Canadian decision apparently had no such effect, for it was
Leesona and not DMRC which finally retreated from its hard line position
in which it had consistently refused to offer a settlement on any basis
other than a two-thirds/one-third split of royalties with DMRC with
Leesona receiving the larger share.
The settlement agreement itself contained a recital which made it
appear to settle more than was actually involved in the pending litigation
when it stated that "Chavanoz, DMRC and Whitin allege that certain of
the aforementioned Chavanoz patents are infringed by the manufacture, sale
or use of certain Leesona yarn processing equipment by Leesona and/or its
customers". The fact is
that the possible infringement of Chavanoz's United States patents by
Leesona had never been an issue in any of the litigation and that these
patents had never been formally asserted against Leesona.
Certain documents written shortly after the consummation of the
settlement agreement shed further light on the intent of the parties with
respect to the reasons underlying the settlement.
For instance, following a telephone conference with Armitage
concerning the wording of the joint press release to be issued a Whitin
vice president wrote to Armitage a "personal and confidential"
letter dated April 8, 1964, in which he stated:
"We grant the desirability of indicating to the world at large
that the Leesona and Chavanoz patents are strong and that competition
against them from any outside source would be difficult at best."
A few days later Armitage wrote to a Finnish manufacturer of false
twist machines who was seeking a United States representative and
explained that as a result of the March 31, 1964 settlement agreement the
validity of the Leesona patents was undisputed and that "this would
put a very considerable burden upon anyone attempting to introduce another
false twist machine in the United States."
Another example of the cooperation between these parties following
the settlement was the action of Armitage following his receipt of notice
that Turbo Machine Company planned to offer for sale on a royalty-free
basis a limited purpose texturing machine of the false twist type.
Recognizing that "this development can be harmful to our
program", Armitage requested that a study be made to determine if the
Turbo machine infringed any of the Chavanoz patents at the same time
observing that the Turbo machine probably infringed Leesona's patents, and
if so, that he "should like to call this to Leesona's attention for
whatever action they may feel advisable to take."
In summary, the massive volume of evidence offered at the trial and
again reviewed in detail post-trial has served to satisfy the court by its
substantial preponderance that the dominant purpose of the March 31, 1964
agreement, as reflected in the statements and conduct of the participants
both before and after that date and in the terms of the agreement itself,
was anti- competitive, that purpose being to preserve and enhance the
interdependent royalty programs of Leesona and Chavanoz/DMRC which a trial
of the pending litigation might well have destroyed.
The court is unable to accept the explanation proffered by DMRC and
Chavanoz that they feared the Leesona patents might be upheld, for they
had long had the opinion of eminent counsel that these patents were
invalid, a judgment which was temporarily vindicated by Judge Atkins in
the Florida litigation.[FN14] The
validity of the Chavanoz patents was not jeopardized, for the validity of
these patents had not been brought into issue in the litigation.
Nor was concern for the sales of ARCT machines a basis for the
settlement, the evidence showing that the sales of these machines at the
time of the settlement were booming.
As noted in Footnote 13, Judge Atkins held the Leesona patents invalid on
summary judgment, but on appeal the Fifth Circuit held there were issues
of fact requiring a trial. In
Re Yarn Processing Patent Validity Litigation, 498 F.2d 271 (1974).
The court understands that thereafter there were various
settlements and that no trial to test the validity of the Leesona patents
A contention advanced by Robert Waters in his testimony that a
Leesona victory in the litigation would have put Whitin out of business is
not convincing. It is true
that a judgment holding the Leesona patents valid would have allowed
Leesona's license program to continue, and if the judgment had also held
the ARCT machines to infringe the Leesona patents, it would have been
necessary to license them under the Leesona patents.
In this event, however, Whitin and ARCT-France would have been
entitled to one-third of the production royalties collected by Leesona at
least until the Leesona licensing program for its competitor manufacturers
was knocked out by the Fifth Circuit in the In Re Yarn Processing case,
supra. Leesona doubtless would have offered its standard manufacturer's
license to Whitin, for its first offer of settlement of the Whitin
litigation to which it adhered almost to the end contemplated this very
arrangement. Thus Whitin for
the first time would have become a beneficiary rather than a reluctant and
unpaid participant in a production royalty program.
In addition to the foregoing findings of fact with respect to the
alleged horizontal conspiracy the court expressly adopts as its own the
following proposed findings of fact submitted by the parties.
1. Plaintiffs' proposed findings of fact on the antitrust issues
Nos. 15.1- 15.10 inclusive, 15.12-15.27 inclusive, 15.29-15.53;
15.55-15.60 inclusive, 15.61 except for its last paragraph, 15.62-15.82
inclusive, 15.84 and 15.85; also 15.54 omitting "ARCT-France."
2. Chavanoz, DMRC and DMI proposed findings of fact on the
anti-trust issues under Section II, Nos. 1-25 inclusive, the first
sentence in No. 26, 27, 28, 30-34 inclusive, the first sentence of 35, 36,
37 except for its first sentence, and with this addition: "In the
case of Gibbs and Smith, they took a Leesona manufacturer's license in
which Leesona paid them to sell to its licensees while there were
lucrative side deals in favor of both Madison and Burlington."
(See PX 1249; PX 1250; Tr. Vol. 83, pp. 16,096-103); No. 38, the
first sentence only of 39, 42-58 inclusive, 60-63 inclusive, 66, 68, the
first sentence only of No. 70, 73, 75, 77, 79-81 inclusive, 82 with the
exception of the statement in parenthesis, the first four sentences of No.
83, 84-86 inclusive, 88, 94 except for its last two sentences, 95-98
inclusive, 100, the first sentence of 101, 105, 117 and 118.
3. ARCT-France's proposed findings of fact Nos. 35 with the
exception of the clause in the first sentence reading "to the point
where only one or two sales were made during the entire year 1962",
36, 37, 39, the first sentence only of No. 40 and 42.
4. ARCT, Inc.'s proposed findings of fact Nos. 43-45 inclusive, 47
except for its last paragraph, 48 except for the last sentence in the
second paragraph and the entire last paragraph, 72, 73, 81-84 inclusive,
86 and 87.
Additional findings of fact will be made later in connection with the individual cases of DMI, ARCT-France and ARCT, Inc.
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