Hooker Chemical Corp. v. Velsicol Chemical Corp. (235 F. Supp. 412, 1964)

BAILEY BROWN, District Judge.

Nature of Action

This is an actjon on a written licensing agreement seeking to recover royalties and seeking other relief. Under this Agreement, entered into in 1951, Hooker Chemical Corp. (Hooker) licensed to Yelsicol Chemical Corp. (Velsicol) the “Know-How of Hooker” and “Licensed Patent Rights” of Hooker to make hexachlor ocyclopentadiene. (Hexachlorocyclopentadiene is frequently referred to in the record and will be referred to in this memorandum decision as “hex” or “C56”, C56 being a trade name of Hooker.) It is the contention of the plaintiff, Hooker, that the defendant, Velsicol, is using the “Know-How of Hooker” and the “Licensed Patent Rights of Hooker” in its Memphis hex plant constructed in 1960. It is the contention of Velsicol that it is not using such Know-How and is not using such Licensed Patent Rights.

Pre-Trial Proceedings and the Trial

Prior to the trial of this action, two pre-trial conferences'were held. The first such conference resulted in an order granting Hooker full discovery as to the Velsicol hex operation at Memphis but limiting the persons who might participate in the discovery and protecting the secrecy of the information ascertained. The second such conference resulted in an order narrowing the substantive issues. Also, prior to the trial, both parties filed memoranda covering their factual and legal contentions.

This action then came on for trial, without a jury, and consumed six very-full weeks. The transcript of the testimony contains approximately ten thousand pages, and there are over five hundred exhibits. Much of the testimony came from experts in chemistry and chemical engineering. Subsequent to the trial, both parties filed full briefs, reviewing the evidence and setting out their factual and legal contentions.

Chemistry Involved

As some knowledge of the chemistry involved is necessary for an understanding of the issues and this opinion, we will first make a brief excursion into the chemistry. We will assume that the reader of this memorandum decision is, as was this Court prior to the beginning of this action, without knowledge in the field of chemistry. What we have to say about the chemistry is taken from the briefs of and is undisputed by the parties, and therefore, at least for purposes of this action, is true.

All matter is made up of various elements, and all atoms of a particular element are the same. A molecule is made up of two or more atoms. In this ease, we will be dealing with only three elements: carbon (C), hydrogen (H), and chlorine (Cl).

The atoms of each element have a characteristic number of valence bonds. Valence bonds are the points of attachment between atoms, and it is by this attachment of atoms that molecules are formed. Carbon has four valence bonds, hydrogen has one, and chlorine has one. To illustrate, a molecule of methane, containing one carbon atom and four hydrogen atoms, can be shown, in structural formula, as follows:

The lines between the atoms indicate valence bonds. The four valence bonds of the carbon atom are satisfied by the single bond of each hydrogen atom.

A carbon atom may be double bonded. That is, two of its valence bonds may be satisfied by bonding with two valence bonds of another atom. For example, two adjacent carbon atoms may be attached by double bonds, and their remaining valence bonds satisfied by other atoms. This can be illustrated by a molecule containing two carbon atoms, double bonded, and four hydrogen atoms, the structural formula being:

When the atoms in a molecule are all single bonded, the molecule is said to be saturated; if there is a double bond in the molecule, it is said to be unsaturated.

Both Hooker and Velsicol use a five-carbon-atom hydrocarbon as a starting material. Hooker’s starting material is called normal pentane, so called because the carbon atoms are in a straight chain .and there are five of them. The structural formula for normal pentane may be .shown as follows:

Velsicol’s starting material is called cyclopentadiene (“eyclo”), and here we introduce still another concept, which is that the carbon atoms in the molecule may present a ring structure rather than a straight chain structure. The structural formula of this starting material is:

Again, the name cyclopentadiene is descriptive : “eyclo” indicates the ring structure, “penta” indicates that there are five carbon atoms, “ene” indicates the double-bonded, or unsaturated, character of the molecule, and the preceding syllable “di” indicates that the molecule is unsaturated twice.

The end product, hexachlorocyclopentadiene (C5 Cl 6) is a cyclic molecule and has five carbon atoms, no hydrogen, and six chlorine (“hexachloro”) atoms and contains two double bonds. Its structural formula is:

Making hex therefore involves, for both parties, the elimination of all hydrogen from their five-carbon-atom hydrocarbon starting materials and the introduction of six chlorine atoms in these molecules. This latter process is called chlorination.

Description of Hooker and of Velsieol Processes

Having covered the basic chemistry involved here, it would be well next to describe, in general, the process for making hex used by Hooker and made available to Velsieol under the Agreement licensing Know-How and Patent Rights and then to describe the process for making hex used by Velsieol at its Memphis plant.

As stated, Hooker starts with normal pentane (usually referred to simply as “pentane”), which it introduces as a gas into and dissolves in liquid partially chlorinated pentane or polychloropentane (PCP). At the same time it introduces into and dissolves gaseous chlorine in this liquid, and a reaction between the pentane and chlorine takes place, which results in the elimination of some of the hydrogen atoms of the pentane molecules and their replacement by chlorine atoms. This is called chlorination in the liquid phase. The reaction product is more liquid PCP. This reaction is carried out at a relatively low temperature and is photochemically catalyzed by ultraviolet light which is present in the reactor. From this reaction chamber, liquid PCP of suitable specific gravity for further chlorination at high temperature in vapor phase is continuously drawn off and is sent on for this further chlorination. A small amount of this reaction product, which is under-chlorinated, is sent through a photochemical after-chlorinator for further chlorination, but the Hooker liquid-phase, low-temperature chlorination is essentially in one step.

The liquid PCP thus produced in the first step chlorination, and which is to be further chlorinated in vapor phase at high temperatures, is passed, together with excess chlorine not consumed in this first reaction, into a vaporizer and the PCP is by heat vaporized. The vaporized PCP and chlorine are then introduced, as a second step in the chlorination, into a thermocatalytic ehlorinator, wherein the POP and chlorine are subjected to heat and a packed fuller’s earth catalyst, further chlorination takes place, and the structure of the molecules becomes cyclical. Here about 90% of Hooker’s hex is made. This second step of chlorination in the Hooker process is the first of two steps in the Hooker high-temperature, vapor-phase zone.

The gaseous effluent from this “cat” ehlorinator contains not only, as stated, a large amount of hex but also contains a substantial amount of octachlorocyclopentene (C 5 Cl 8), or “octa,” the structural formula of which is:

Hooker then, as a third step, passes the vapors from the cat ehlorinator through a unit which consists of a group of parallel nickel-alloy tubes heated inside a shell, where, at still higher temperatures, the “octa” is cracked to hex. Hooker calls this unit a “cracker” because of its primary function. It will also sometimes be referred to hereafter as a “hot tubes” reactor. This cracking involves eliminating two chlorine atoms and introducing a second double bond in the octa molecule. Hooker contends that the nickel present in these tubes acts as a catalyst in dechlorinating octa to hex.

The gaseous effluent from the cracker, which contains a high percentage of crude hex, is quickly cooled by being brought into contact with liquid crude hex. The unreacted chlorine and the hydrogen chloride in the effluent are separated from the crude hex and crude hex is further purified by distillation.

Velsicol’s process also makes use of a relatively low-temperature, liquid-phase chlorination followed by a high-temperature, vapor-phase chlorination. Velsicol’s liquid-phase chlorination, however, is in two steps and its vapor-phase is in one step, while, as has been seen, Hooker’s liquid-phase chlorination is one step and its vapor-phase is in two steps.

Velsicol introduces and dissolves liquid cyclo, its starting material, into a reaction chamber containing liquid partially chlorinated cyclopentane or polychlorocyclopentane (PCCP). At the same time it introduces and dissolves gaseous chlorine into this PCCP. The chlorine and the cyclo then react, not in the presence of light, to form more PCCP. The aim of this first step of liquid-phase chlorination is to produce a PCCP of a degree of chlorination approximating tetraehlorocyclopentane, which has a structural formula:

This involves saturating both double bonds of the cyclo molecule by adding four chlorine atoms, leaving the six hydrogen atoms in the molecule. Velsicol calls the product of the first step of the liquid-phase chlorination, which is in great part tetraehlorocyclopentane, “PCL 1.” PCL 1 is then drawn off and sent on to the second step of the liquid-phase chlorination.

In Velsicol’s second step of the liquid-phase, low-temperature chlorination, PCL 1 is introduced into a reaction chamber containing a more highly chlorinated liquid PCCP and is dissolved therein. At the same time, gaseous chlorine is introduced and dissolved into this same more highly chlorinated PCCP. The chlorine and the PCL 1 then react, not in the presence of light, to form more of this more highly chlorinated PCCP. The aim of this second step chlorination is to produce a PCCP of a degree of chlorination approximating hexachlorocyclopentane, which has a structural formula as follows:

This involves removing two hydrogen atoms and substituting two chlorine atoms in the molecule of the tetrachlorocyclopentane contained in PCL 1. Velsicol calls the product of the second step of the liquid-phase chlorination, which is in great part hexachlorocyclopentane, “PCL 2.” PCL 2 is then drawn oif and is sent on for further chlorination in the high-temperature zone.

It should be noted here that the five carbon atoms in the ring of the cyclo molecule, with which Velsicol starts, maintain their ring structure throughout the first and second steps of chlorination and further that at the completion of the second step, to the extent that PCL 2 contains hexachlorocyclopentane, to make hex there only remains the elimination of four hydrogen atoms and the reintroduction of two double bonds. It appears, however, that PCL 2 contains some under-chlorinated materials, requiring more chlorination to make hex, and it also contains a substantial amount of octa, which must be cracked to make hex.

PCL 2 is then by heat vaporized, additional gaseous chlorine being introduced at this point, and the vapor is passed through a group of parallel nickel-alloy tubes, the tubes being heated inside a shell, where the vapor is further heated. This unit, similar in appearance and design to Hooker’s cracker, is variously referred to in this memorandum decision and in the record as a “hot tubes” reactor, as the “H-10 unit” and, because of its outside appearance, as the “cigar.” There a reaction takes place which converts the various PCL 2 components— hexachlorocyclopentane, octa, and under-chlorinated materials — to hex.

The gaseous effluent from this high-temperature zone, which contains a high percentage of crude hex, is quickly cooled by being brought into contact with liquid crude hex. The unreacted chlorine and the hydrogen chloride in the effluent are separated' from the crude hex and the crude hex is further purified by distillation.

Hex, incidentally, is used as an intermediate in the manufacture of insecticides and for other purposes, but we are not concerned here with its uses.

General Background of Controversy

For several years prior to the execution of this licensing Agreement with Hooker in 1951, Velsicol had manufactured hex in a plant at Marshall, Illinois, using a process involving the chlorination of cyclo with sodium hypochlorite. This is the Strauss process, and the hex so manufactured is referred to in the record as “Marshall hex” or “Strauss hex.” This process does not, as do the Hooker process and the Velsicol-Memphis process, involve direct chlorination with elemental chlorine of the hydrocarbon starting materials.

After Velsicol had begun the manufacture of Strauss hex, Hooker, which had an agreement to finance research at Purdue University, with Purdue began to develop a process for the direct chlorination of pentane to make hex. Such a process, it became apparent by 1947, could make a much purer hex than did the Strauss process, obviating costly purification procedures to get pure grade hex. When Velsicol heard about this work, it became interested because its starting material, cyclo, was in short supply and its general need for hex, in making chlordane, was increasing. Accordingly, beginning in 1947, Velsicol made small purchases of this purer grade hex for purposes of testing, and to assist Velsicol in evaluating this product, Hooker made certain technical information available to Velsieol.

Velsieol eventually decided, however, to continue to manufacture chlordane with Strauss hex, but in the meantime it had developed a new product, heptachlor, the production of which absolutely required a purer hex as a starting material, and it encouraged Hooker to increase its hex capacity. In September, 1950, Velsieol advised Hooker that it would need 300,-000 pounds of hex in 1951 and 500,000 pounds a month in 1952. The production of hex in these quantities would require a substantial investment in new capacity by Hooker, and consequently Hooker expressed doubt as to the feasibility of its meeting Velsicol’s hex requirements. Velsieol then considered the possibility of meeting its requirements by increasing its capacity to make Strauss hex and by further purifying the hex. The problem here was the short supply of cyclo and the cost of purification.

In October, 1950, Hooker advised Velsieol that it could commit itself to supply 50,000 pounds of hex per month by March, 1951. Velsieol offered to work out an agreement to supply to Hooker needed chlorine from Velsicol’s existing chlorine plant at Memphis.

In December, 1950, Mr. Wilks, vice-president in charge of research and development for Velsieol, together with R. B. MacMullin, Velsicol’s engineering consultant, visited Hooker at Niagara Falls and were shown a hex pilot plant. It might be well to digress here and insert a brief account of the history of the development of the Hooker process described in this opinion earlier, which is the pi’oeess revealed to Mr. Wilks at this time. Even before around December, 1950, Hooker had been making hex, as stated, by direct chlorination and by using pentane as a starting material. The low-temperature, liquid phase step, using ultra-violet light as a catalyst and being essentially the same as that heretofore described, made use of the McBee-Devaney Patent No. 2,473,162, issued June 14,1949, which Hooker had obtained a license to use through its relation with Purdue. (Hooker does not claim Velsieol is using this patent.) At that time, the POP produced in the liquid phase was then converted to hex by simply passing the POP as a vapor with gaseous chlorine through a hot tube. This high-temperature, vapor-phase chlorination made use of the process claimed by the McBee-Baranauckas (“hot tube”) Patent No. 2,509,160, issued May 23, 1950, which Hooker had obtained a license to use through Purdue. This is one of the two Hooker patents that Hooker is here claiming Velsieol is using.

When Wilks of Velsieol visited the Hooker pilot plant in December, 1950, Hooker was developing an improvement on the process just described. The liquid-phase, low-temperature chlorination procedure would remain the same and would produce the liquid POP to be vaporized and chlorinated in a vapor-phase, high-temperature chlorination. Under the new process, however, after the POP was vaporized, before passing it through hot tubes, it would first pass through a thermocatylitic ehlorinator, packed with a fuller’s earth catalyst, and then, at still higher temperatures, pass through the hot' tubes. This improvement in the Hooker process of manufacturing hex is claimed by the Maude-Rosenberg Patent No. 2,650,942, issued September 1, 1953. Maude and Rosenberg were on the Hooker research staff.. The claims of this patent cover both the cat ehlorinator step and the following hot tube step in the making of hex with vaporized POP as a feed material. Hooker does not contend Velsieol is using this Hooker patent.

It was the development and the introduction of this improved process using the cat ehlorinator that made the Hooker process economically feasible. The prior process, i. e. liquid-phase photochemical chlorination (MeBee-Devaney) followed only by hot-tube, vapor-phase chlorination (McBee-Baranauckas), had not produced an amount of hex, when compared with the amount of chlorine and pentane fed, to make the process profitable.

To further digress to complete the history of the development of the Hooker process: Maude and Rosenberg obtained a patent, No. 2,742,506, issued April 17, 1956, which claims in substance that if nickel or nickel-alloy tubes are used in the hot-tube step in the making of hex, the nickel will, acting as a catalyst, aid in dechlorinating to hex any octa that is contained in the vapor feed. This patent is referred to in the record as the “nickel” patent, and Hooker contends Velsicol is using it.

Following December, 1950, the parties kept in contact concerning the problem of meeting Velsicol’s requirements. Hooker considered many possibilities for increasing the production of Hooker hex, even including the forming of a jointly owned subsidiary with Velsicol. The parties realized at the time that Velsicol’s only alternative to supplying its needs with Hooker hex was to increase its production of Strauss hex, and Velsicol concluded that the purchase of Hooker hex was preferable because of the shortage of its starting material, cyclo, and the prospective savings to it in using Hooker hex.

In January, 1951, Velsicol expressed concern whether Hooker was willing to make the additional plant investment to supply Velsicol and for the first time inquired whether Hooker would license its process. Hooker replied that such a license would be improbable. However, in late February, 1951, Hooker advised Velsicol that it definitely would not be able to commit itself to supply Velsicol with 500,000 pounds of hex per month in 1952 and, at this meeting, the possibility of a license was explored by the parties.

By early March, Hooker had decided to grant Velsicol a license. Accordingly, it obtained from Purdue the authority to sub-license the McBee-Devaney patent covering photochemical, liquid-phase chlorination. A patent had not yet issued on the Maude-Rosenberg cat chlorinator —cum—hot tube improvement, but it was contemplated that this patent would, when issued, be covered by the license. It was thought by Hooker, and confirmed to Velsicol, that in view of the Maude-Rosenberg improvement, the McBee-Baranauckas “hot tube” patent would no longer be used in the process. Moreover, Plooker thought, in view of the poor results it had had, that the McBee-Baranauckas patent was of no real economic value in making hex. Therefore Hooker did not then seek from Purdue the authority to sub-license that patent. The invention which was the basis of the Maude-Rosenberg “nickel” patent had not yet been conceived. Hooker and Velsicol executed the licensing Agreement in April, 1951, but effective March 1, 1951, the Agreement covering “Know-How of Hooker” and “Licensed Patent Rights” and listing only the McBee-Devaney patent.

Subsequent to the execution of this licensing Agreement, Velsicol employed R. B. MacMullin and Associates, consulting engineers, to design a plant to use the Hooker process and to be constructed at Memphis. Concededly, Hooker made available to MacMullin and to Velsicol all necessary information to design such a plant. After the plant was designed, Velsicol purchased the equipment for installation, but later decided not to construct the plant and in 1954 sold the equipment to Hooker. Hooker was willing to and did pay Velsicol about twice what the equipment was worth to Hooker, because it desired to continue to sell hex to Velsicol. Hooker had been selling hex to Velsicol and by the time the decision not to construct the Memphis plant was made, Hooker by its improved process and increased capacity was able to supply Velsicol’s needs. Velsicol remained a large customer of Hooker throughout the 1950’s.

In 1957, Hooker raised the price of hex and Velsicol, exercising its rights under the licensing Agreement, sent its representatives to examine the Hooker plant at Niagara Falls and the newer plant at Montague, Michigan and otherwise collected further information from Hooker about its process for making hex. This effort in gathering information terminated in early 1958, and Velsicol at that time took no steps to construct a hex plant.

In June, 1959, Hooker again raised the price of hex. In September, Velsicol became aware that new processes for recovering chlorine and hydrogen from hydrochloric acid were available, and the economic use of this by-product HC1 was, Velsicol thought, the key to the economic manufacture of hex. Velsicol therefore decided to explore the possibility of making hex by direct chlorination using cyclo as a starting material. Cyclo had by then become available in sufficient quantities. Velsicol’s hex purchase contract with Hooker for the calendar year 1961 could be cancelled only by giving notice prior to July 1, 1960, and therefore, if Velsicol was to cancel the purchase contract, it was necessary for Velsicol to know by that date whether it had a satisfactory process and it was necessary to have its new plant in operation by early 1961. Accordingly, in September, 1959, Velsieol entered into a ei*ash program to develop a process, which it succeeded in doing and gave Hooker a cancellation notice in late June of 1960. It had its plant in operation at Memphis by early 1961-. It now has a patent covering its process. (Hanna-Rudnitzki Patent No. 3,073,869 issued January 15, 1963).

Subsequent to receiving the cancellation notice and ascertaining that Velsicol was making hex by a new process, Hooker made several inquiries of Velsicol whether it was using Know-How and patent rights under such circumstances as would make it liable to Hooker for royalties. Velsicol denied that it was so using either such Know-How or patent rights, but Hooker, not satisfied with the answers to its inquiries, in the fall of 1961 filed this suit.

Does the Agreement With Respect to “Know-How” License Information or Does It License a Process ?

With respect to the difficult and multifaceted question whether Velsicol, as a result of its Memphis hex operation, is obligated to pay royalties to Hooker for use of “Know-How of Hooker,” we first must determine whether, along with certain patents, the Agreement licenses information or licenses a process. It is the contention of Hooker that the Agreement, properly interpreted, licenses the right to use certain information to be furnished by Hooker. It is the contention of Velsicol, on the other hand, that the Agreement, properly interpreted, licenses the right to use the Hooker process. Velsieol’s contention may be more accurately stated by saying that it contends that it is not obligated to pay royalty on “Know-How of Hooker” unless the information imparted to it is used to manufacture hex by the Hooker process.- This, however, amounts to contending that Hooker has only licensed and Velsicol is only obligated to pay Know-How royalty on the process.

The preamble to the Agreement reads as follows:

“Whereas, HOOKER represents that it has certain patent rights and Know-How necessary to the construction and operation of a plant for the manufacture of C56 and is willing to license VELSICOL to use its said rights and Know-How; and

“Whereas, VELSICOL is interested in obtaining the right to utilize the said rights and Know-How of HOOKER pertaining to the making of C56 ■ * * * ”

The granting clause provides in part: “Article 2 — The Grant.

“(A) Subject to the provisions of Article 5 hereof HOOKER hereby grants to VELSICOL a non-exclusive, non-assignable right and license under the Licensed Patent Rights to use the inventions therein described and claimed and to use the said Know-How of HOOKER.”

The royalty provision reads in part as follows:

“Article 3 — The Royalty.

“(A) During the life of this Agreement, VELSICOL shall pay HOOKER a royalty of one cent ($0.01) for each pound of C56 made by it using the Licensed Patent Rights.

“(B) From the date of this Agreement and during the first five (5) years after the date of beginning operations hereunder by VELSICOL, which latter date shall be the last day of the first month in which production of C56 at the rate of at least one hundred thousand (100,000) pounds per month is accomplished by VELSICOL in accord with the Know-How of HOOKER, VELSICOL shall pay HOOKER a royalty of two cents ($0.02) for each pound of C56 made by it using the Know-How of HOOKER. During the next succeeding four (4) years after said five (5) year period, VELSICOL shall pay HOOKER one cent ($0.01) per pound of C56 made by VELSICOL using the Know-How of Hooker.”

The term “Know-How of Hooker” is defined as follows:

“Article 1 — Definitions.

“(B) The term 'Know-How of HOOKER,’ as used herein, means all technical information necessary to design and operate a commercial plant capable of producing polychloropentanes by the photochemical chlorination in the liquid phase of a pentane and the thermocatalytic formation of C56 from polychloropentanes, including the recovery as muriatic acid of the hydrogen chloride thereby produced, and the recovery of by-product chlorocarbons.”

It should be pointed out here that if Velsicol is correct in its contention that it is not obligated to pay Know-How royalty unless it is using the Hooker process, the process being generally described in the above-quoted definition of “Know-How of Hooker,” Velsicol is clearly not obligated to pay such royalty. This is true because Velsicol is not using the Hooker process. It is not, in the liquid phase, producing polychloropentanes but rather polychlorocycíopentanes and, more importantly, is not there using photochemical chlorination. Velsicol is not, in the vapor phase, forming C56 from polychloropentanes but rather from polychloroeyciopentanes. And, more importantly, it is not, in the vapor phase, making C56 by “thermocatalytic” formation as this word was intended to be used in the Agreement. This word was obviously intended to refer to Hooker’s new cat (fuller’s earth) chlorinator and was not intended to refer to the Maude-Rosenberg nickel tube cracker, claimed by Hooker to employ nickel as a catalyst in cracking octa to hex. The Maude-Rosenberg “nickel” patent had not been conceived at the time the Agreement was executed.

Accordingly, if this Court concluded that Velsieol’s construction of the Agreement is correct, this conclusion would dispose of the Know-How part of this lawsuit. We cannot, however, reach that conclusion; on the contrary, it is our conclusion that the Agreement, properly interpreted, creates an obligation to pay royalty for use of information. We first consider the Agreement within its four corners and then consider parol evidence.

At the outset, it should be noted that the preamble refers to the licensing, not of a process, but of patents and of Know-How. Moreover, the granting clause conveys the right to use patents and Know-How, not a process. Nowhere in the Agreement is there a limitation on the use, or the manner of use, to which the Know-How imparted could be put by Velsicol. The royalty clause, with respect to Know-How, creates the obligation to pay royalty when production of hex at the rate of 100,000 pounds per month “ * * * js accomplished by Velsicol in accord with the Know-How of Hooker * * * ” and sets a royalty of 2 cents and later 1 cent per pound for hex made “ * * * using the Know-How of Hooker * * Again, there is no reference to the use of a particular process.

In the definition of “Know-How of Hooker” contained in Article 1(B) of the Agreement, it is not defined as a process but rather is defined as all information necessary to design and operate a plant for making hex by a particular process. The reference to the particular process in the definition is only to describe and delimit the technical information to be furnished. Clearly, the technical information, not the process, is the Know-How.

While the Court was reasonably sure at the trial that this was clearly the proper construction of the Agreement when considered within its four comers and that therefore extrinsic evidence probably should not be considered, we did admit such evidence. This evidence, we think, confirms our interpretation. It is true that the parties, in their preliminary memoranda, refer only to the licensing of and a single royalty on a process, and it is true that initial drafts of the Agreement prepared by Hooker embodied the same approach. However, it is also clear that, by the time the Agreement was executed, Hooker had changed its mind and wanted one royalty on patents and another on Know-How rather than one royalty on the Hooker process. Hooker therefore so changed the wording of the Agreement.

Mr. Gary, counsel for Velsicol in negotiating the Agreement, testified that he intended that the licensing of Know-How cover a process. He testified that this “definition licensing,” defining the process to be licensed rather than attempting to list all the pertinent patents, is common in industries where there are many patents involved because it is difficult to keep all patents listed on the license. Here, however, the parties were dealing with very few patents. Moreover, the Agreement provides separately for patent and Know-How royalties, and it expressly provides for the listing of patents.

The record also shows that the claims of the patent listed (McBee-Devaney) and the contemplated claims of the patent to be listed (Maude-Rosenberg improvement) together covered the process. Therefore it would have been rather redundant to provide for payment of one royalty on the patents and another on the process, though it is true, as Velsicol points out, that the process could possibly be used by one operating outside the patent claims.

Moreover, the record in this case indicates that it would at least be possible for Velsicol to use a substantial amount of the information imparted by Hooker and yet not use the Hooker process. And it would have made no sense for Hooker to have, on the one hand, agreed to furnish information and then, at the same time, to have allowed Velsicol to avoid payment of royalty on this information by not using the Hooker process. There is no reason to believe that the parties intended that the information be a gift to Velsicol even though Velsicol was not using its process.

Know-How Issues

We have determined that the Agreement licenses and provides for payment of royalty on use of information. It would be well, now, to define the remaining Know-How issues generally.

The first issue is: what information is “Know-How of Hooker” for purposes of this action ? Answering this question requires answering two subsidiary questions. The first is: what kind of information is Know-How generally ? The second is: upon what “Know-How of Hooker” may Hooker rely in asserting its royalty claim, in view of the terms of the Agreement, the facts developed at the trial, the narrowing of the issues by order of the Court, and the law generally?

The second issue is: what are the general considerations in determining how much of this “Know-How of Hooker” has been used by Velsicol?

The third issue is: what amount of “Know-How of Hooker” used by Velsicol will require the payment of royalties thereon ?

We propose to discuss these general Know-How issues in turn and then, having so developed the applicable principles and general considerations, apply these to the proof in determining whether Velsicol is liable to Hooker for payment of Know-How royalty.

What Information is “Know-How of Hooker” for Purposes of this Action?

“Know-How” is generally defined in Mycalex Corporation of America v. Perneo Corporation, D.C., 64 F.Supp. 420 at page 425 as follows:

“ * * * factual knowledge not capable of precise, separate description but which, when used in an accumulated form, after being acquired as the result of trial and error, gives to the one acquiring it an ability to produce something which he otherwise would not have known how to produce with the same accuracy or precision found necessary for commercial success. * * * ”

We consider this to be a correct definition of Know-How.

' In its pre-trial memorandum, Hooker inserted (pp. 69 through 75) an exhibit setting out “Some Examples of Velsicol’s Use of Know-How of Hooker.” At a pretrial conference held for the purpose of narrowing the issues, the Court required Hooker to furnish Velsicol a list of any additional items of Know-How that Hooker contended that Velsicol is using and, if any further Know-How was discovered by Hooker upon which it intended to rely, required Hooker to so advise Velsicol immediately. Hooker, pursuant to this order, did furnish Velsicol with an additional list of items of Know-How and further was allowed to add one item during the trial. Accordingly, Hooker is limited to the Know-How items set out in the exhibit to the pre-trial memorandum, plus the items on the list furnished to Velsicol following the pre-trial conference (the foregoing items being combined in one list by Velsicol and filed as Exhibit DX 296), plus the item specifically added during the trial.

Velsicol points out correctly that, by definition, Know-How is limited to information that could be used in the Hooker process. We doubt, however, that this limitation would actually exclude any information claimed by Hooker to constitute Know-How. This is true because all such information could be used in the Hooker process.

Hooker contends that it may treat as Know-How any technical information so long as it was not known to Velsicol. Velsicol contends that technical information cannot be treated as Know-How, even though not known to it, if it was published or generally known to those practiced in the art and particularly if it constituted standard practice. In making this argument, Velsicol relies in part on particular provisions in the Agreement and in part on the applicable law in this field.

One of these provisions in the Agreement reads as follows:

“Article 4- — Disclosure by HOOKER.

“(A) HOOKER shall disclose to VELSICOL all Know-How of HOOKER. Any and all technical information so disclosed to VELSICOL shall at all times remain the property of HOOKER and VELSICOL shall treat as confidential all such information and shall not divulge any such information to others, except to the extent necessary for the operations of VELSICOL hereunder, without the written consent of HOOKER so long as such information shall not be published.”

Velsicol argues that because the Know-How imparted was to remain the property of Hooker, Know-How is by the Agreement limited to information in which one can have a property right. It then argues that one can have a property right only in a trade secret and cannot have a property right in information which is published or which is known generally to those skilled in the art, citing cases. Therefore, Velsicol argues, the agreement excludes from Know-How all information which was published or known generally to those skilled in the art.

We would, absent another consideration, be inclined to construe this provision — that the Know-How is to remain the property of Hooker — as meaning only that Velsicol was prohibited from disclosing any such information to another and not to construe it as having the effect of relieving Velsicol of liability for royalty for using such information as is not the “property” of Hooker. This other consideration is the fact that, unless we give this provision the effect of relieving Velsicol of the obligation to pay royalty on information that is not a trade secret of Hooker, it appears that the Agreement in this respect would be void as against public policy.

The Court of Appeals for the Sixth Circuit seems to so hold in Reynolds Metals Co. v. Skinner, 166 F.2d 66 (1948), cert. denied 334 U.S. 858, 68 S.Ct. 1528, 92 L.Ed. 1778 (1948). In that case the plaintiffs entered into an agreement with the defendant’s assignor providing for the employment of plaintiffs and the assignment of plaintiffs’ patents concerning the extrusion of metals, with royalties to be based on the licensee’s sales. The licensee could terminate the agreement after notice, but was then required to discontinue the extrusion of metal under and by means of the “processes, patents and devices” of the plaintiffs. The plaintiffs supervised the installation of a plant for the defendant and, in addition to installing the equipment covered by their patents, introduced some unpatented devices. The defendant subsequently terminated the agreement, but continued to operate the plant after making certain equipment changes. The plaintiffs brought suit for royalties claiming, inter alia, that the defendant continued to use a number of unpatented processes or devices disclosed by the plaintiffs and that they were entitled to compensation for such use.

On this point the trial court held in favor of the plaintiffs, but the Court of Appeals modified this ruling, stating:

“Men who have knowledge of a certain art cannot collect royalty for the use of unpatented devices known to and used in the trade merely because of their know-how. They must have conceived, invented or developed the devices or processes in order to be entitled to compensation for their use. Otherwise the monopoly of the patent law would be extended with disastrous effect. As we construe it, the contract in this immediate provision does not cover any tools, methods or processes which * * * [plaintiffs] * * * did not originate or so substantially improve that they became invested with their ownership. Otherwise construed, we think the contract would be void as against public policy.”

The holding in the foregoing case, together with the holding in A. 0. Smith Corp. v. Petroleum Iron Works Co., 73 F.2d 531 (C.A.6, 1934), indicate that a party may not license and collect royalty on technical information or a process or the like, unless it constitutes a discovery by the licensor which has been withheld from the public domain. It does not have to be, these cases made clear, a patentable invention, but it must have the requisites we have just set out. It would therefore appear to matter not whether we construe this Agreement as having this effect, or whether we construe it as Hooker advocates we should construe it and then hold that the Agreement in this respect is void as against public policy.

Velsicol argues that there is another reason why technical information which had been published or had become generally known in the industry cannot'be relied upon by Hooker. Here Velsicol asserts the benefit of the more favored licensee provision in its Agreement with Hooker coupled with an agreement Hooker subsequently made with Shell Development Company. As will be seen, we uphold this Velsicol contention, and therefore this is an alternative basis for so limiting the information upon which Hooker may rely.

The more favored licensee provision in the Hooker-Velsieol Agreement reads as follows:

“Article 8 — No other License — Favored Licenses

“HOOKER warrants there is no outstanding license by it under the Licensed Patent Rights. HOOKER agrees that if it shall enter into an agreement under the Licensed Patent Rights to use the inventions therein described and claimed or to use the Know-How of PIOOKER on more favorable terms and conditions than those herein specified, then and ^hereafter VELSICOL shall, under ' substantially similar conditions, have the benefit of such more favorable terms and conditions.”

- It appears that Shell became interested in obtaining a license on the Hooker, process to malee hex in Holland and, therefore, in August, 1953, to enable Shell to determine finally whether it would negotiate such a license, Hooker agreed to furnish Shell technical information concerning its process. The agreement between Hooker and Shell, setting out the conditions under which the information would be furnished, is contained in a letter from Shell to Hooker, which reads in pertinent part as follows:

“We [Shell] have been discussing with you [Hooker] the basis upon which we may obtain on behalf of our affiliated company, Bataafsche Petroleum Maatschappij, technical information relating to your process for the production of hexachlorocyclopentadiene. Our Associated company is interested in this process for its possible utilization in a plant to be constructed in The Netherlands. The following sets forth the basis upon which such technical information will be made available to us.

“1. ‘Confidential Information’ as used herein shall mean technical information relating to such process and disclosed or confirmed to us by you in writing or by drawings, which information is not already in our possession prior to such disclosure and which is not and does not become a part of the public knowledge or literature and is not hereafter acquired by us from a third party.

“2. We agree not to divulge any confidential information in whole or in part to any third party and not to make any commercial use thereof without your written consent. This agreement on our part shall continue for so long as such information remains confidential, as a matter of fact.

Pursuant to this letter agreement, Hooker made a complete revelation of the technical information covering its process for making hex, even allowing Shell technical personnel to visit and study its plant at-Niagara Falls. Shell, however, chose not to take a Hooker license and later built a plant in Holland embodying the Hyman thermal (sometimes called the Lidov) process.

That process starts with cyclopentadiene (“cyclo”), which is chlorinated in liquid phase to tetrachloroeyclopentane, which is then chlorinated in a second liquid-phase step to octachlorocyclopentene (“octa”). These liquid-phase chlorinations do not make use of photochemical (i. e., ultra-violet light as a catalyst) chlorination. It then cracks or dechlorinates the octa to hex in vapor phase in a nickel or nickel-alloy tube reactor. ■ It will be seen that this process is similar to the Velsicol first and second step liquid-phase ehlorinations, except that it chlorinates further in the second step. It will also' be seen that the third step, in vapor-phase, is similar to the Hooker and Velsicol third steps insofar as they crack octa to hex.

Velsicol contends, as stated, that it is entitled to the mox-e favorable terms with respect to Know-How which are contained in the agreement between Hooker and Shell. Under this agreement, Velsicol points out, Shell may make commercial use of all technical information furnished to it except information defined therein as- “confidential.” Velsicol further points out that all technical information that is a part of public knowledge or literature is excluded from “confidential” information. Velsicol still further points out that Shell, having this information, has built and is operating a hex plant using a process similar to Velsicol’s and, argues Velsicol, even if Shell is not actually using this information which is not “confidential” under its agreement with Hooker, it has a right to use it for commercial purposes and without limitation, which is sufficient to enable Velsicol to invoke the more favored licensee provision, citing Guggenheim v. Kirchofer, 66 F. 755 (C.A.2, 1895), Cold Metal Process Co. v. McLouth Steel Corp., 170 F.2d 369 (C.A.6, 1948), and 69 C.J.S. Patents § 263.

Hooker replies that the more favored licensee provision cannot here be invoked by Velsicol because Hooker has not given consent to Shell to make use of the information imparted to it and because it has not given what technically may be called a license to use the information and because the conditions under which it imparted the information to Shell are not substantially similar to those under which it imparted the information to Velsicol. Hooker, however, in making this first argument, fails to recognize that under its agreement with Shell, Shell is entitled without Hooker’s consent to use the Know-How, even for commercial purposes, unless the Know-How is covered by the definition of “confidential information” contained in the agreement. Velsieol is here only seeking for the same right to use, without paying royalty, Hooker information which is not “confidential” in that it is a part of public knowledge or literature. Next, while it is true that Hooker has not granted to Shell a license in the technical sense to make hex using the Hooker process, Article 8 of the Hooker-Velsicol Agreement, upon which Velsicol here relies, does not require, before it can be invoked, that the agreement between Hooker and a third party be a license. While the parties to this action have generally referred to Article 8 as a “more favored licensee” provision, this does not control the proper interpretation of this Article. It is true that the caption of Article 8 includes the words “Favored Licensee.” But the Article specifically provides “Hooker agrees that if it shall enter into an agreement * * * to use the ‘Know-How of Hooker’ on more fa- , vorable terms than those herein specified. * * * ” Finally, the words in Article g « * x x under substantially similar conditions * * * ” do not, as Hooker contends, describe the conditions under which Article 8 may be invoked but rather describe the rights of Velsicol after it has a right to invoke the provisions of that Article. j

It is true, as Hooker points out, that Hooker received the consent of Velsicol before entering into these negotiations with Shell (Velsicol’s license, for a limited time, having been an exclusive license), but there is no indication that Velsicol thereby waived any rights it had under the more favored licensee provision. ^

For the reasons indicated, we are of the opinion that information which, was generally known to those practiced in the art or published in the literature, at least at the time the information was received by Velsicol, cannot be relied upon by Hooker. -I

Velsicol also contends that technical information communicated to it by Hooker not pursuant to the Agreement cannot be relied upon by Hooker. This contention includes information communicated prior to the execution of the Agreement, and it also includes information communicated after execution of the Agreement provided it was communicated pursuant to the supplier-customer relation of the parties. Hooker does not appear to take issue with this contention except that Hooker contends that information which was communicated prior to execution of the Agreement, but in anticipation of the Agreement, can be relied upon by it. The only Know-How communicated prior to this Agreement with respect to which this distinction would be important is the report dated December 8,1950, by Maude and Rosenberg entitled “Hexaehlorocyelopentadiene by Catalytic Thermal Chlorination.” Velsicol contends that this document was handed by Hooker’s Mr. Sconce to Velsicol’s Mr. Wilks when the latter visited the Hooker Niagara Falls pilot plant on December 14, 1950. If this were the fact, the delivery was made before the parties had entered into license negotiations. Hooker contends, however, which we find to be the fact, that the document was mailed to Velsicol about March 21, 1951, which was before the Agreement was actually signed but after the effective date of the Agreement. Accordingly, it is clear that the information contained in this document was communicated pursuant to the Agreement.

Before passing to the next major Know-How issue, it should be pointed out that Velsicol contends, and Hooker does not insist to the contrary, that Know-How that Velsicol already had when communicated by Hooker may not be relied upon by Hooker in support of its royalty claim.

General Considerations in Determining

How Much “Know-How of Hooker” is Velsicol Using

In their argument as to whether Velsicol is using a substantial amount of Hooker Know-How, Hooker, much more than does Velsicol, paints the picture with broad strokes. In doing so, Hooker adopts what might be called a wrongful evasion or guilty mind theory of Velsicol’s conduct. It argues that Velsicol intended, at least when it decided in September, 1959, to devise a process for making hex by direct chlorination with cyclo as the starting material, to attempt to skirt Know-How and patent royalty liability under its Agreement with Hooker. As an indication of a motive to wrongfully evade Know-How royalty, Hooker points out that Velsicol decided to call this project the “PCL Project,” to avoid references to “C56,” the Hooker trade name, in referring to the project, and to keep the project a secret from Hooker.

Hooker also points to the fact that Velsicol showed unusual and complete confidence in its ability to develop, and that it did develop, a process by June 30, 1960, in time to give notice of the hex purchase contract cancellation and to be in production by early 1961. Thus, argues Hooker, Velsicol anticipated relying on and must in fact have relied on Hooker Know-How. Hooker also points to the fact that, at least initially, JVelsicol assumed it would have both a patent and a Know-How royalty obliga-' tion to Hooker, that this assumption was changed later to include only a lesser royalty (it is not clear how much), and that it was not until March, 1951, that Velsicol, on advice of counsel, determined that it would owe no royalty on its process. Hooker also points to the fact that Velsicol employed Meissner Engineers to design its new plant and that Mr., Kronseder, who recently had worked for Velsicol and who had received information on the Hooker process, had become employed by Meissner and was in charge of the design project for that firm.

In response to the Hooker wrongful evasion theory, Velsicol points out that it was highly important for it temporarily to keep its project to make pure grade hex secret from Hooker, for Hooker was its life line for that product. But Velsicol does not explain why the secrecy of such an intention was considered so important in 1959-1960 but was not important to it when it considered making pure grade hex in 1957-1958. We think a more real difficulty in accepting Hooker’s theory that Velsicol intended, beginning in September, 1959, to use Hooker patents and Know-How and to wrongfully evade royalty payments, is that Velsicol could'well have laid down no tracks and yet it did lay down some. It could have left out royalty provisions in its cost projections from the beginning and, moreover, Velsicol did not have to put in writing in committee minutes its decisions to substitute “PCL” for “C56” and to keep the project secret.

With respect to its confidence in its ability to develop and its development of a process within the time available to it, Velsicol validly points to its own experience in hex chemistry, to the expert proof it offered that the time consumed was not unusually short to accomplish the task at hand, that it actually did not begin to order plant equipment until it had worked out its process in the laboratory and the pilot plant, and that it had many “bugs” to eradicate from its process and plant after it got into production. With respect to its initial assumption that it. would owe a royalty to Hooker, Velsicol validly points out that it did not then know exactly what its process would ultimately be and that those who made the assumption were not lawyers and were making a conservative assumption in presenting cost projections to the Velsicol board. With respect to its employment of Meissner Engineers and Mr. Kronseder’s former connection with Velsicol and receipt of Hooker information, Velsicol points out correctly that Kronseder certainly did not leave Velsicol to be available at Meissner to head up this plant design project, that there were plenty of people at Velsicol who had Hooker information and who could have made it available to any design engineering firm Velsicol chose to employ, and that a great part of the design of the plant can actually be traced to Velsicol’s laboratory and pilot plant work plus original calculations made at Meissner.

This circumstantial evidence relied upon by Hooker would, in spite of Velsicol’s explanations, be rather persuasive if one did not take the trouble to analyze each item of Know-How to determine to what extent Hooker may rely thereon and then to try to trace that on which Hooker may so rely into the Velsicol process and plant.

Hooker argues that, with respect to its conceded burden of showing a causal relation between what it imparted to Velsicol and what Velsicol is doing, this Court must infer that there is such a cause-and-effect relation if it is shown that certain information was furnished and that the Velsicol process or plant made use of the conception so imparted. We agree that we may reasonably, as the trier of the fact, make that inference, but we may also reasonably not make that inference, e. g., where it is shown that what Velsicol is doing can be traced to experimentation and design work carried out by Velsicol and its engineers for use in the Velsicol process. We are not, in short, required to make that inference, and Grepke v. General Electric Co., 280 F.2d 508 (C.A.7, 1960), relied upon by Hooker, does not so hold.

How Much Know-How Must Be Used to Create Royalty Liability?

We come now to the last general Know-How issue, and that is: how much Know-How must Velsicol use to incur liability for royalty.

As stated, it is Velsicol’s basic position that it is in no event liable for Know-How royalty unless it is using Know-How in making hex by the Hooker process, and we have already ruled against this contention. Velsicol then argues that, because the definition of Know-How in the agreement begins “The term ‘Know-How of Hooker,’ as used herein, means all technical information necessary to design * * and because the royalty provision creates an obligation to pay royalty on hex made “ * * * using the Know-How of Hooker * * it is obligated to pay royalty if, and only if, it is using in its process all the technical information furnished to it to enable it to make hex by the Hooker process. We do not, however, believe that that is a reasonable interpretation of the agreement, for it would be patently absurd to conclude that the parties intended, when they executed the Agreement, that Velsicol could avoid royalty merely by not using some item of Know-How.

On the other hand, it also was obviously cpntemplated by the parties, at the time they executed the Agreement, that Velsicol would immediately proceed to construct a plant using the Hooker process. It is true that the Agreement puts no limit on when Velsicol must construct the plant and get into operation, but it will be remembered that this licensing Agreement was entered into only after Hooker advised Velsicol that it was not willing to create the capacity to meet Velsicol’s urgent demand for large amounts of hex. In short, what did happen — the building of a plant by Velsicol nine years later using a different process — was not in the contemplation of the parties in 1951 when they executed the license.

It thus becomes the not unusual task of a Court to “construe” the Agreement in applying it to this unforeseen contingency. This involves reading into the Agreement, after considering the terms of the Agreement and the surrounding facts and circumstances, what the parties would have said if this unforeseen contingency had been specifically under consideration at the time they executed it. See, for example: Baldwin Rubber Co. v. Paine and Williams Co., 107 F.2d 350, 353 (C.A.6, 1939) ; 3A Corbin on Contracts, Sec. 622; and 17A C.J.S. Contracts § 328. Certainly in view of the fact that the Know-How royalty is double the patent rights royalty, the parties would not have expected that a Know-How royalty be paid for the use of an insignificant amount of Know-How. It is our conclusion, therefore, that Velsicol is liable to Hooker for Know-How royalty if it is using technical information imparted to it by Hooker which qualifies, under standards herein outlined, as “Know-How of Hooker” and if that information has significantly contributed to the Velsicol process or plant.

Velsicol is Not Using Know-How of Hooker Which Significantly Contributes To Its Process or Plant

Velsicol, in defending against the claim for Know-How royalty, concedes that Hooker performed its obligation to make available all technical information necessary to design and operate a plant to make hex by the Hooker process. Velsi-, col contends, however, in making its defense, that it simply is not using any — or in any event not a significant amount— of information upon which Hooker may rely.

In general support of its position, Velsicol points out that in 1960-1961, Hooker decided to develop a process for making hex using either dicyclopentadiene or cyclo as starting materials. (Dicyclopentadiene is simply two cyclo molecules joined together or polymerized. Velsicol first depolymerizes dicyclo and then, of course, uses cyclo as the starting material.) Velsicol points out correctly that Hooker, using its own Know-How, found it necessary to perform a great deal of laboratory work to develop a process, which Hooker believed to be “workable” but not “economically attractive.” Velsicol further points out correctly that in developing this process Hooker ignored much of the Know-How it is here claiming Velsicol is using.

In its approach to this problem, Velsicol takes the various Know-How points relied upon by Hooker — -in its pre-trial brief, plus the additional list, plus the one point added at the trial — and applies these tests:

1. Was this particular information communicated?

2. Was it communicated to Velsicol pursuant to the license Agreement?

3. Does the difference between the Hooker and Velsicol processes make the information valueless to Velsicol ?

4. Was the information well known to those practiced in the art or was it published and generally available ?

5. Did Velsicol already know and use the information before it was communicated by Hooker?

6. Was the facet of the Velsicol process or plant allegedly using “Know-How of Hooker” developed by Velsicol experimentation or by Velsicol’s independent engineers?

The list comprising all of these Know-How items contains thirty-nine items. A full discussion of each of these items would require as much space as this opinion has to this point consumed. Accordingly, we will simply make a general finding and then discuss in particular only those items which appear to the Court to merit