Duplan Corp. v. Deering Milliken, Inc.

444 F. Supp. 648 (D.S.C. 1977)

   Part 1 of 6  


The United States District Court, D. South Carolina

Decided July 29, 1977


             Paul 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 & Mfrs., Inc.

              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 Industries, Inc.

              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.


              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.


              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.

FN1. 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 infringement.

              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]

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 Appendix C.

              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 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 Place         

              --------            ---------------         

              Plaintiff                           Incorporation       of Business             

              ---------                           -------------       -----------             

              Blanchard Yarn Company, Inc.        Delaware            Whitakers, N.C.         

              Burlington Industries, Inc.         Delaware            Greensboro, N.C.        

              Burkyarns, Inc.                    North Carolina      Valdese, N.C.           

              Dixie Yarns, Inc.                   Tennessee           Stanfield, N.C.         

              The Duplan Corporation              Delaware            Winston-Salem, N.C.     

              Frank Ix & Sons Virginia            New Jersey          Charlottesville, Va.    


              Hemmerich Industries, Inc.          Pennsylvania        Denver, Pa.            

              Jonathan Logan, Inc.                Delaware            Spartanburg, S.C.       

              Lawrence Texturing Corporation      (Division of        Lillington, N.C.        


              Leon-Ferenbach, Inc.                Pennsylvania        Johnson City, Tenn.     

              Madison Throwing Company            (Division of        Madison, N.C.           


              National Spinning Company, Inc.     New York            Washington, N.C.        

              Olympia Industries, Inc.            Delaware            Tuscaloosa, Ala.        

              Reliable Silk Dyeing Company, Inc.  New York            New York, N.Y.          

              Schwarzenbach-Huber Company         New Jersey          Luray, Va.              

              Spring-Tex, Inc.                    North Carolina      Gibsonville, N.C.       

              Texelastic Corporation              North Carolina      High Point, N.C.        

              Texfi Industries, Inc.              Delaware            Lumberton and New Bern, 


              United Merchants & Manufacturers,   Delaware            Cartersville, Ga. and   

              Inc.                                                   South Carolina         

              The defendants opposing the Throwster plaintiffs are the following parties:

              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 ARCT-France.

              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 directors.

              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 United States.

              f. Walter E. Mueller was chief house patent counsel for DMRC (and its predecessor Deering Milliken Research Trust) from April, 1951 to March 1, 1968.

              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.

              2,891,375  3,165,881 

              2,944,319  3,232,037 

              3,012,397  3,283,414 

              3,123,973  3,584,450 

              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 misuse.

              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: 

           I. ANTITRUST 

           II. PATENT MISUSE 



           These issues will be treated in the succeeding sections of the memorandum.



              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 order.

              1. The Chavanoz-ARCT Agreements.

              On October 30, 1954, Chavanoz entered into an agreement with ARCT-France (The  "1954 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 sole judge.  

           "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]

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 concerned." 

  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 plaintiffs herein.

           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 of royalty.

           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 supplemental agreements.

           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 and Whitin.

           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.

FN4. 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 States.

              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 follows: 

           "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 thereafter. 

           "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 like. 

           "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 signed.

           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 user.

           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."  (DX 821).

           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 laws.[FN5]

FN5. 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 royalties;

              (2) The Chavanoz-ARCT-France agreements required ARCT-France to assign to Chavanoz ("grant-back") patent rights in all improvements;

              (3) Chavanoz and DMRC conspired to fix the price of the ARCT machines through the use royalties exacted from the Throwster purchasers; and

              (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 contrary conclusion.

              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 . . ."

FN6. 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 obligation.  Sacramento 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.

FN7. 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 (November, 1974).

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 following:

              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 arrangement.

              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. 1951).

              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.

The Tying Arrangement

              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 antitrust laws.

              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 unpatented  "technical 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]

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 wrote: 

  "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."  (PX 215).

              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 that 

           "(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 favor. 

           "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 definition. 

           "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. 1977).

           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 arrangement.  Clayton 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 trademark "Fluflon".

              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 Superloft machine.

              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]

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.

FN10. 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 with Leesona's.[FN11]

FN11. 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 thereafter.

              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 ourselves. 

           "(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 per pound.

           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]

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, Soep said: 

           "As you will remember the DMRC/Chavanoz agreement provides for a royalty reduced to one-half its amount as long as there is substantial unlicensed competition. 

           "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."  (PX 363).

           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 affiliates.

           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."  (PX 338).

           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]

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."  (PX 222).

              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 A).

              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."  (PX 344).

           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."  (PX 533).

           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."  (PX 463).

           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.

FN14. 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 was held.

              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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