Edward Katzinger Company v. Chicago Metallic Manufacturing Company/Opinion of the Court

The question here is whether the defendant, in a suit to recover royalties only under a terminated patent license agreement containing price-fixing provisions, can challenge the validity of the patent despite a covenant in the license contract that he would not do so.

The petitioner, Edward Katzinger Company, and the respondent, Chicago Metallic Mfg. Company, make and sell tin baking pans. The undenied testimony was that Metallic sold its pans over a large part of the United States, probably in every state in the country. Katzinger became owner of Jackson patent No. 2,077,757 on a certain type of pan. Metallic, accused of infringing, entered into a licensing contract under which, upon payment of stipulated royalties, it was authorized to manufacture and sell pans made in accordance with the claimed invention. Section 3 and 11 of the license contract, set out below, provided that Metallic, like all other licensees, should sell these pans at prices fixed by Katzinger. Royalties were to be computed on the basis of 'net sales' of articles 'made in accordance with any of the patents or applications under this license.' Section 14 provided that if Metallic elected to terminate the contract, without ceasing to manufacture the pans Metallic should 'be estopped from denying the validity of said patent * *  * and be deemed an infringer thereof.' Metallic maintained the patentee-fixed prices and paid royalties on pans deemed by it to be covered by the patent.

A controversy later arose as to whether certain types of pans manufactured by Metallic were covered. Declining to pay royalties on this type of pan, Metallic gave notice of terminatio of the contract and initiated this action for a declaratory judgment praying that the court declare that the patent was invalid for want of invention and that the controversial pans were not covered by, and did not infringe, any of Katzinger's patents. Katzinger in an answer and counterclaim alleged, so far as material here, that the patent covered all the Metallic pans, that Metallic was estopped to challenge validity of the patent by § 14 of the contract, and that Metallic either owed royalties or was liable for infringement. It prayed, among other things, for an accounting for unpaid royalties which were to be computed at 2.5% to 5% of the sales price which was governed by the minimum price list attached to the license. In the alternative it prayed that Metallic be required to account for profits and damages as an infringer. The District Court held that Metallic was estopped to challenge the validity of the patents, and, treating them as valid, found that the patent claims did cover all the pans. Accordingly, it ordered an accounting to determine royalties due for the period prior to termination of the license contract, and for infringement damages thereafter.

Relying upon our decision in Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173, 63 S.Ct. 172, 87 L.Ed. 165, the Circuit Court of Appeals reversed. It held that the agreement to fix prices was inseparably connected with the agreement to pay royalties; that if the patent was invalid, the price-fixing provision violated the federal anti-trust laws; that conflict of the price-fixing provision with the anti-trust laws would make the agreement to pay royalties unenforceable; and that the District Court had erred in barring Metallic from challenging the patent's validity as a predicate to establishing the illegality and consequent unenforceability of the royalty covenant. The cause was remanded to the District Court to pass upon validity of the patent. 7 Cir., 139 F.2d 291. That Court then held the patent invalid and rendered judgment for Metallic. The Circuit Court of Appeals affirmed. 7 Cir., 153 F.2d 149. We granted certiorari because of a conflicting decision in Westinghouse Electric & Mfg. Co. v. MacGregor, 350 Pa. 333, 38 A.2d 244. The Pennsylvania Supreme Court in the MacGregor case ruled that price-fixing provisions in a license agreement such as the one before us were severable from the agreement to pay royalties, and read our Sola case as though it were a holding that a licensee was estopped to challenge a patent's validity except in cases where a licensor sought affirmative relief to enforce price-fixing provisions of a license.

We need not consider whether under the ruling of Bement & Son v. National Harrow Co., 186 U.S. 70, 87, 91, 22 S.Ct. 747, 753, 755, 46 L.Ed. 1058, these price-fixing provisions would be lawful if the patent were valid. The question here is entirely different. Nor need we, as it has been suggested, discuss this Court's opinions in Kinsman v. Parkhurst, 18 How. 289, 15 L.Ed. 385, and United States v. Harvey Steel Co., 196 U.S. 310, 25 S.Ct. 240, 49 L.Ed. 492, which were concerned with particular circumstances there involved. In the Sola case (317 U.S. 173, 63 S.Ct. 173) we declined to examine these prior decision, holding that neither of them was relevant because 'No price-fixing stipulation was involved in the license contract' at issue in those cases. So here, it would be inappropriate to reexamine those decisions now. Under what other circumstances a federal rule of estoppel might be applied is a question which can be met when particular facts present it.

The Sola case reaffirmed past decisions holding that price-fixing agreements such as those here involved are unenforceable because of violations of the Sherman Act, 15 U.S.C.A. §§ 1-7, 15 note, save as they may be within the protection of a lawful p tent. That case held further that local rules of estoppel cannot screen such agreements from court scrutiny, and that federal courts must, in the public interest, keep the way open for the challenge of patents which are utilized for price-fixing of interstate goods. It is true that the licensor there not only sought a recovery of royalties, but prayed generally for an injunction to require observance of all the provisions of the license agreement, one of which provisions was for price-fixing. But that the chief object of that suit was to recover royalties and not to require observance of the price-fixing provisions is indicated by the fact that, while breaches of other covenants of the contract were alleged in the petition, and specific prayers for their observance were included, there was no charge that the licensee had breached the price-fixing covenant and there was no specific prayer to require observance of it. Nor did this Court indicate that the patent would have been immune from challenge had the licensor sued for royalties only. This would have permitted a licensor to be protected on an illegal contract merely because he chose one remedy rather than another on the same substantive issue. If we had intended to draw such a fine line, it is hard to believe that such a careful writer as the late Chief Justice would have failed to indicate in the opinion of the mandate of the Court in the Sola case that on remand the trial court, while permitting challenge of the patent to defeat the injunction, must treat the price-fixing provision as severable, and forbid challenge for the purpose of defeating the claim for recovery of royalties. That decision, instead of resting on such a narrow procedural base, was firmly grounded upon the broad public interest in freeing our competitive economy from the trade restraints which might be imposed by price-fixing agreements stemming from narrow or invalid patents. Sola Electric Co. v. Jefferson Electric Co., supra, 317 U.S. at page 177, 63 S.Ct. at page 174, 87 L.Ed. 165.

In Scott Paper Co. v. Marcalue Mfg. Co., 326 U.S. 249, 66 S.Ct. 101, it was held that even an assignor who had sold a patent issued to itself was free to challenge the validity of the patent and thereby defeat an action for infringement by showing that the invention had been described in an expired patent. In thus emphasizing the necessity of protecting our competitive economy by keeping open the way for interested persons to challenge the validity of patents which might be shown to be invalid, the Court was but stating an often expressed policy that 'It is the public interest which is dominant in the patent system,' Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661, 665, 64 S.Ct. 268, 271, 88 L.Ed. 376, and that the right to challenge 'is not only a private right to the individual, but it is founded on public policy, which is promoted by his making the defense, and contravened by his refusal to make it.' Pope Mfg. Co. v. Gormully, 144 U.S. 224, 235, 12 S.Ct. 632, 636, 36 L.Ed. 14.

If the question of severability, urged by the petitioner here, were a new one, we should again arrive at the conclusion we reached in the Sola case. Metallic's obligation to pay the royalties and its agreement to sell at prices fixed by Katzinger constituted an integrated consideration for the license grant. Consequently, when one part of the consideration is unenforceable because in violation of law, its integrated companion must go with it. See Hazelton v. Sheckels, 202 U.S. 71, 78, 26 S.Ct. 567, 50 L.Ed. 939, 6 Ann.Cas. 217. Moreover, solicitude for the interest of the public fostered by freedom from invalid patents and from restraints of trade, which has been manifest by the line of decisions of which the Scott Paper Co. and Sola cases are two of the latest examples, requires that there should be no departure from the guiding principles they announced.

The royalties here claimed accrued, if they accrued at all, prior to the time the license agreement terminated. Consequently, the fact of subsequent termination does not free the promise to pay royalties from the taint of the price-fixing provision. Nor does the fact, if it be a fact, that Metallic itself suggested the price-fixing provision, bar Metallic's challenge to the patent's validity. For the contract was still illegal, whoever suggested it, so that there is no less reason for leaving the way open to challenge the patent as a service to the public interest than if Katzinger had suggested price-fixing. Finally, Metallic's specific contract not to challenge the validity of Katzinger's patent can no more override congressional policy than can an implied estoppel. See Scott Paper Co. v. Marcalus Mfg. Co., supra, 326 U.S. at page 257, 66 S.Ct. at page 105, and cases cited.

Affirmed.