Sauquoit Fibers Co. v. Leesona Corp. (541 F.2d 1127, 1976)

NICHOLS, Associate Judge:

The caption indicates the styles and docket numbers of the appeals dealt with in this opinion. They were all consolidated for argument; they are appeals taken from summary judgments entered in various patent and antitrust lawsuits which previously had been consolidated in the Southern District of Florida for the purpose of pre-trial proceedings. In Re Yarn Processing Patent Validity Litigation, 341 F.Supp. 376 (Jud. Pan.Mult.Lit.1972). Many of these cases have already come before us on the issue of patent validity. See, In Re Yarn Processing Patent Validity Litigation, 498 F.2d 271 (5th Cir.), cert. denied, 419 U.S. 1057, 95 S.Ct. 640, 42 L.Ed.2d 654 (1974). Approximately fifty lawsuits were originally filed. Some have been settled, some stayed pending the outcome of this appeal, and some are now before us. We dealt separately in Appeal No. 74-3703, 530 F.2d 83 (1976), as to the right of one of the counsel to participate in the cases. Treble damage claims by Leesona Corporation in Appeal No. 74 — 2835 was slated for separate decision but has now been settled.

After a general statement, applicable to all the cases in this group, we take up separate appeals or groups of appeals that involve common issues. No attempt will be made to bring together here all of the controlling facts involved in the cases. Further necessary facts have been set forth in conjunction with the individual appeals. The discussion in the latter parts of the opinion incorporate by reference many of the facts and issues which are discussed in previous parts, and the discussion of the several appeals should be read seriatim to make sense. The following facts are set forth simply to identify the parties and place the controlling facts discussed with the individual appeals in their proper context. The major theme which the appeals dealt with in this opinion have in common is the patent abuse doctrine under which a patentee loses the power to enforce a patent if he uses it in violation of the antitrust laws. Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488, 62 S.Ct. 402, 86 L.Ed. 363 (1942); Carter-Wallace, Inc. v. United States, 449 F.2d 1374, 196 Ct.Cl. 35 (1971).

The basic false twist process is a method for producing a synthetic yarn which is suitable for weaving cloth. It uses continuous filament fibers which have too little bulk to be woven. The false twist process causes the individual filaments to twist up upon themselves, thus creating yarn that has characteristics of softness and stretchability that are useful for many fabrics. There are different processes but they all involve the application of heat to the fibers as they are twisted over spools. The basic processes which cause the fibers to twist up to the maximum degree use one heater and they are also sometimes referred to as single heater patents. Double heater processes are methods by which the degree of twist imparted to the fibers is controlled by a second heater. The processed yarn is sometimes referred to as textured or crimped yarn. The companies which produce the textured yarn are called throwsters, a term previously used in the silk industry.

Two basement inventors, Nicholas J. Stoddard and Warren A. Seem, invented the false twist process. They had extensive experience in the fiber industry and conducted joint experiments in the mid-1930’s. In 1944, a partnership known as Permatwist Company (Permatwist) was formed between the inventors and two financiers, Fred Tecce and Harold Berger. After further experimentation and development, patent applications on the basic false twist process were filed January 4, 1954. The application resulted in United States patents 2,803,105; 2,803,108; and 2,803,109. These single heater patents expired in 1974.

The single heater patent applications were sold later in 1954 to a machinery manufacturer then known as the Universal Winding Company. This Company later changed its name to Leesona Corporation (Leesona), and we will refer to it as such. Under the 1954 agreement, Permatwist assigned what were to become single heater patents to Leesona. The agreement fixed a base cost per spindle for the machinery manufactured by Leesona, at this time the Model 550 machine; the sales price per spindle was also fixed. Permatwist -would receive as consideration for the assignment a spindle royalty of V2 the margin over base cost calculated on the basis of the number of spindles capable of operation on machinery sold by Leesona. Leesona was obligated under the terms of the agreement to license other machinery manufacturers under the single heater patents. Furthermore, Leesona also agreed to sell only to licensed throwsters who agreed to pay a use royalty which would be split with Permatwist.

Leesona had developed technology for improved spindles on its machinery at the time the 1954 agreement was executed. Over the next several years, patent applications were filed by Leesona. The principle United States patents issued for the spindles are the 2,791,086 issued in June 1957; and patents for two high speed spindles, the 3,044,247 issued July 17, 1962, and the 3,134,218 issued May 26, 1964. The details of the licensing program have been changed many times in subsequent modifications of the initial Leesona-Permatwist agreement, in 1958, 1960, 1965 and 1967.

The 1958 agreement was made by the same parties to reflect the installation of the Leesona high speed spindles on most of the models. These models and the fixed price per spindle for each model are more clearly identified in the 1958 agreement. Modifications were made in the split between Permatwist and Leesona of the margin over cost. The 1960 agreement was a further modification to reflect the installation of an even more efficient high speed spindle on the Leesona Model 553 machine. The price per spindle was set for this model as well as Permatwist’s share of the margin over cost. The 1960 agreement did not effect the similar terms for models manufactured under the 1958 agreement.

Each of the agreements provided a measure. of price flexibility for Leesona. For example, the 1954 agreement allowed a price reduction up to 10% of the prices fixed by the agreement. Further reductions required the written consent of Permatwist. Under all the agreements, 1954, 1958 and 1960, Permatwist sold its single heater patents in exchange for both an agreed share of royalty income to be received from licensed throwsters as well as a share of the profits from the sale of machines to be sold at the fixed price.

Beginning in 1964, Leesona began to complain that it could not pay the machine royalties to Permatwist and remain competitive. Specifically, Leesona represented that it would be required by market conditions to introduce a more sophisticated Model 554 machine at the same price as the 553 machine, even though the production cost would be higher for the 554. By letter agreement dated January 21, 1964, Permatwist agreed to suspend the spindle royalty for a minimum two year period only on machines sold for use in the United States and Canada. It continued to receive a set spindle royalty on the 554 for machines sold elsewhere. No mention was made in this agreement of any price fixing terms.

A further agreement, dated December 15, 1965, extended the suspension of spindle royalties to all models developed by Lessona. However, Permatwist was to receive a 5% royalty for machines sold outside the United States, Canada, and the United Kingdom in lieu of the production royalty. The agreement recited Lessona’s competitive arguments as the circumstances leading to the modifications. On June 5, 1967, Leesona and Permatwist signed an agreement which made the waiver of spindle royalties permanent subject to later reinstitution if Leesona experienced an increase in its usual gross margin; in that event, the increase or rather excess belonged to Permatwist. The 1967 agreement also reaffirmed the existing agreements.

Throughout this period, Stoddard and Seem continued their work, and they developed double heater processes. Under the terms of the 1954 agreement, Leesona acquired the double heater patent rights which resulted in United States patents 3,091,912 and 3,077,724. However, there were competing patent applications by a French machinery manufacturer known as ARCT and others. Leesona and the French manufacturers agreed not to sue each other for infringement. The Permatwist partners wanted Leesona vigorously to press a licensing program under the double heater patents. Finally, in 1967, Lex Tex Limited (Lex Tex) a North Carolina corporation, was formed to license the Stoddard and Seem double heater patents. The stock was owned by Fred Tecce, a lawyer already mentioned as one of the Permatwist partners, and by Robert F. Conrad, a trial lawyer working for Leesona. The ’912 and ’724 patents were assigned to Lex Tex and Lex Tex assumed Leesona’s obligation under the 1954 agreement to engage actively in a licensing program for the patents. The largest portion of the royalty income was paid to Permatwist by Lex Tex. Lex Tex subsequently acquired another double heater patent, United States patent, 3,472,011, from Ernest Scragg and Sons, Ltd., a British concern.

Under the terms of the manufacturing licenses, competing machinery manufacturers were paid a portion of the royalty income generated on the machines which had been manufactured and sold by them. As we discuss in more detail in the individual appeals, these royalty “kickbacks” constitute a minimum level of compensation that each manufacturer received for the machines it had made. We use “kickback” for want of a better term, without pejorative intent.

The history of much of this litigation is stated in the opinion of the Judicial Panel on Multidistrict Litigation, supra, 341 F.Supp. at 376. In general, the throwsters have repudiated the license agreements which obligated them to pay royalties, contending that the patents are invalid. They sought declaratory judgments holding that the patents are invalid and that the patents have been misused and are unenforceable. In some cases, treble damages and injunctive relief had been sought for alleged antitrust violations. Leesona and Lex Tex have counterclaimed or have filed separate lawsuits for patent infringement and breach of license agreements. After massive discovery, the throwsters filed motions for summary judgment against Leesona, Lex Tex, and the Permatwist partners. Previous motions for summary judgment were granted by the District Court Judge on the issue of patent validity but this court reversed, supra, 498 F.2d 271. These motions relate primarily to the antitrust and patent misuse issues although there remains a minor invalidity issue dealt with here.

The first order on the summary judgment motions was entered April 25, 1974, and a corrected order was entered July 11, 1974. In this order, Judge C. Clyde Atkins denied a motion filed by Celanese Corporation alleging that the acquisition of the Scragg ’Oil patent was a violation of § 7 of the Clayton Act.

In the same order, Judge Atkins granted in part a motion filed by twenty-four New York throwsters and held the single heater patents and the spindle patents unenforceable because of misuse in the hands of Leesona, the then current patent holder. The misuse was predicated on a finding that the manufacturing license agreements violated §§ 1 and 2 of the Sherman Act. Judge Atkins declined to rule that the violations caused proximate injury to the throwsters for which treble damages are recoverable under § 4 of the Clayton Act. Partial summary judgments were entered pursuant to Rules 54(b) and 56. In these judgments, Lessona was enjoined from continuing the violations found by the trial judge. This aspect of the case is the subject of appeal by Lessona in Case No. 74 — 3589.

Also in this same order, Judge Atkins held the double heater patents misused both by Lex Tex and the former owner, Leesona. A motion filed by Universal Textured Yarns, another major throwster, was granted, and partial declaratory summary judgments were entered pursuant to Rules 54(b) and 56. This aspect of the case is appealed by Lex Tex in Case No. 74-3699.

In the corrected order of July 11, 1974, Judge Atkins overruled the contention of Celanese that the Leesona-Permatwist combination itself operated as a per se antitrust offense because of the royalty and price fixing for the machinery. However, in an order dated February 27, 1975, the Judge reconsidered the matter and granted the Celanese motion holding that the double and single heater patents had been misused. This determination had been appealed by Leesona in Case No. 75-2030 and by Lex Tex in Case No. 75 — 2029; however, these cases have been settled. Although all of these patents had already been declared misused under the order of July 11, 1974, we will consider the grounds stated by Judge Atkins in this subsequent order as support for the previous order.

SAUQUOIT FIBERS COMPANY v. LEESONA CORPORATION, et al.

Case No. 74-3589.

The subject matter of this appeal is the manufacturing licensing system set up by Leesona and Permatwist, under which machinery manufacturers other than Leesona obtained the right to manufacture machines incorporating the various patented processes. We are primarily concerned here with the relationship between the patentee, Leesona, and the machinery manufacturers and the throwsters. In the corrected order of July 11, 1974, Judge Atkins granted a summary judgment holding that the manufacturing license agreements signed by Leesona and the 14 machinery manufacturers violated §§ 1 and 2 of the Sherman Act; and, therefore, the single heater and high speed spindle patents used as an integral part of these arrangements have been misused and are unenforceable. The trial judge reserved for the trier of fact the question of whether the plaintiffs have sustained the requisite injury to maintain a treble damage action. The facts upon which the judgment is based have been compiled by the trial judge from the Local Rule 10(J)(2) statements. The following summary of the relevant facts should enable the reader to understand the issues of the case.

We pick up with the 1954 agreement between Leesona and Permatwist. Under that agreement, Leesona and Permatwist shared the royalty income which was derived from the throwsters. In 1954 the royalty was fixed by Leesona and Permatwist at 25