Standard Oil Company v. United States/Opinion of the Court

This suit was brought by the United States in June, 1924, in the federal court for northern Illinois, to enjoin further violation of section 1 and section 2 of the Sherman Anti-Trust Trust Act July 2, 1890, c. 647, 26 Stat. 209 (15 USCA §§ 1, 2). The violation charged is an illegal combination to create a monopoly and to restrain interstate commerce by controlling that part of the supply of gasoline which is produced by the process of cracking. Control is alleged to be exerted by means of seventy-nine contracts concerning patents relating to the cracking art. The parties to the several contracts are named as defendants. Four of them own patents covering their respective cracking processes, and are called the primary defendants. Three of these, the Standard Oil Company of Indiana, the Texas Company, and the Standard Oil Company of New Jersey, are themselves large producers of cracked gasoline. The fourth, Gasoline Products Company, is merely a licensing concern. The remaining forty-six defendants manufacture cracked gasoline under licenses from one or more of the primary defendants. They are called secondary defendants.

Upon the filing of the answers, which denied the violation charged, the case was referred to a special master to take and report the evidence to the court, together with his findings of fact and conclusions of law. Although the Attorney General had filed an expediting certificate on February 24, 1925, it was not until January 20, 1930, that the District Court entered its final decree. This hearings before the master extended over nearly three years. The evidence, including 327 exhibits, fills more than 4,300 pages of the printed record. The master's report, which occupies 240 pages, is devoted largely to a discussion of the seventy-three patents and seventy-nine license contracts. The master found that the primary defendants had not pooled their patents relating to cracking processes; that they had not monopolized or attempted to monopolize any part of the trade or commerce in gasoline; and that none of the defendants had entered into any combination in restraint of trade. He recommended that the bill be dismissed for want of equity. After a hearing, on 273 exceptions filed by the Government, the District Court granted some of the relief asked. 33 F. (2d) 617. The primary defendants and twenty-five of the secondary defendants appealed to this Court. An order of severance was entered; and the injunction was stayed.

The issues to which most of the evidence was addressed have been eliminated. The violation of the Sherman Act now complained of rests substantially on the making and effect of three contracts entered into by the primary defendants. The history of these agreements may be briefly stated. For about half a century before 1910, gasoline had been manufactured from crude oil exclusively by distillation and condensation at atmospheric presure. When the demand for gasoline grew rapidly with the widespread use of the automobile, methods for increasing the yield of gasoline from the available crude oil were sought. It had long been known that from a given quantity of crude, additional oils of high volatility could be produced by 'cracking'; that is, by applying heat and pressure to the residum after ordinary distillation. But a commercially profitable cracking method and apparatus for manufacturing additional gasoline had not yet been developed. The first such process was perfected by the Indiana Company in 1913; and for more than seven years this was the only one practiced in America. During that period the Indiana Company not only manufactured cracked gasoline an large scale, but also had licensed fifteen independent concerns to use ats process and had collected, prior to January 1, 1921, royalties aggregating $15,057,432.46.

Meanwhile, since the phenomenon of cracking was not controlled by any fundamental patent, other concerns had been working independently to develop commercial processes of their own. Most prominent among these were the three other primary defendants, the Texas Company, the New Jersey Company, and the Gasoline Products Company. Each of these secured numerous patents covering its particular cracking process. Beginning in 1920, conflict developed among the four companies concerning the validity, scope, and ownership of issued patents. One infringement suit was begun; cross-notices of infringement, antecedent to other suits, were given; and interferences were declared on pending applications in the Patent Office. The primary defendants assert that it was these difficulties which led to their executing the three principal agreements which the United States attacks; and that their sole object was to avoid litigation and losses incident to conflicting patents.

The first contract was executed by the Indiana Company and the Texas Company on August 26, 1921; the second by the Texas Company and Gasoline Products Company on January 26, 1923; the third by the Indiana Company, the Texas Company, and the New Jersey Company, on September 28, 1923. The three agreements differ from one another only slightly in scope and terms. Each primary defendant was released thereby from liability for any past infringement of patents of the others. Each acquired the right to use these patents thereafter in its own process. Each was empowered to extend to independent concerns, licensed under its process, releases from past, and immunity from future claims of infringement of patents controlled by the other primary defendants. And each was to share in some fixed proportion the fees received under these multiple licenses. The royalties to be charged were definitely fixed in the first contract; and minimum sums per barrel, to be divided between the Taxes and Indiana companies, were specified in the second and third. These royalty provisions, and others, will be detailed later.

First. The defendants contend that the agreements assailed relate solely to the issuance of licenses under their respective patents; that the granting of such licenses, like the writing of insurance, New York Life Insurance Co. v. Deer Dodge County, 231 U.S. 495, 34 S.C.t. 167, 58 L. Ed. 332, is not interstate commerce; and that the Sherman Act is therefore inapplicable. This contention is unsound. Any agreement between competitors may be illegal if part of a larger plan to control interstate markets. Montague & Co. v. Lowry, 193 U.S. 38, 24 S.C.t. 307, 48 L. Ed. 608; Shawnee Compress Co. v. Anderson, 209 U.S. 423, 28 S.C.t. 572, 52 L. Ed. 865. Such contracts must be scrutinized to ascertain whether the restraints imposed are regulations reasonable under the circumstances, or whether their effect is to suppress or unduly restrict competition. Chicago Board of Trade v. United States, 246 U.S. 231, 238, 38 S.C.t. 242, 62 L. Ed. 683; Paramount Famous Lasky Corp. v. United States, 282 U.S. 30, 43, 51 S.C.t. 42, 75 L. Ed. 45. Moreover, while manufactre i § not interstate commerce, agreements concerning Ed. 145. Moreover, while manufacture is to fix the price of goods entering into interstate commerce, or which have been executed for that purpose, are within the prohibitions of the Act. Swift & Co. v. United States, 196 U.S. 375, 397, 25 S.C.t. 276, 49 L. Ed. 518; Coronado Coal Co. v. United Mine Workers, 268 U.S. 295, 310, 47 S.C.t. 551, 69 L. Ed. 963; United States v. Trenton Potteries Co., 273 U.S. 392, 47 S.C.t. 377, 71 L. Ed. 700, 50 A. L. R. 989. And pooling arrangements may obviously result in restricting competition. Compare Northern Securities Co. v. United States, 193 U.S. 197, 326, 24 S.C.t. 436, 48 L. Ed. 679. The limited monopolies granted to patent owners do not exempt them from the prohibitions of the Sherman Act and supplementary legislation. Standard Sanitary Manufacturing Co. v. United States, 226 U.S. 20, 33 S.C.t. 9, 57 L. Ed. 107; Virtue v. Creamery Package Manufacturing Co., 227 U.S. 8, 33 S.C.t. 202, 57 L. Ed. 393; Compare United Shoe-Machinery Co. v. United States, 258 U.S. 451, 42 S.C.t. 363, 66 L. Ed. 708; United States v. General Electric Co., 272 U.S. 476, 47 S.C.t. 192, 71 L. Ed. 362. Hence the necessary effect of patent interchange agreements, and the operations under them, must be carefully examined in order to determine whether violations of the Act result. Standard Sanitary Manufacturing Co. v. United States, 226 U.S. 20, 33 S.C.t. 9, 57 L. Ed. 107.

Second. The Government contends that the three agreements constitute a pooling by the primary defendants of the royalties from their several patents; that thereby competition between them in the commercial exercise of their respective rights to issue licenses is eliminated; that this tends to maintain or increase the royalty charged secondary defendants and hence to increase the manufacturing cost of cracked gasoline; that thus the primary defendants exclude from interstate commerce gasoline which would, under lower competitive royalty rates, be produced; and that interstate commerce is thereby unlawfully restrained. There is no provision in any of the agreements which restricts the freedom of the primary defendants individually to issue licenses under their own patents alone or under the patents of all the others; and no contract between any of them, and no license agreement with a secondary defendant executed pursuant thereto, now imposes any restruction upon the quantity of gasoline to be produced, or upon the price, terms, or conditions of sale, or upon the territory in which sales may be made. The only restraint thus charged is that necessarily arising out of the making and effect of the provisions for cross-licensing and for division of royalties.

The Government concedes that it is not illegal for the primary defendants to cross-license each other and the respective licensees; and that adequate consideration can egal ly be demanded for such grants. But it contends that the insertion of certain additional provisions in these agreements renders them illegal. It urges, first, that the mere inclusion of the provisions for the division of royalties, constitutes an unlawful combination under the Sherman Act (15 USCA § 1 et seq.) because it evidences an intent to obtain a monopoly. This contention is unsound. Such provisions for the division of royalties are not in themselves conclusive evidence of illegality. Where there are legitimately conflicting claims or threatened interferences, a settlement by agreement, rather than litigation, is not precluded by the Act. Compare Virtue v. Creamery Package Co., 227 U.S. 8, 33, 33 S.C.t. 202, 57 L. Ed. 393. An interchange of patent rights and a division of royalties according to the value attributed by the parties to their respective patent claims is frequently necessary if technical advancement is not to be blocked by threatened litigation. If the available advantages are upon on reasonable terms to all manufacturers desiring to participate, such interchange may promote rather than restrain competition. Compare American Column & Lumber Co. v. United States, 257 U.S. 377, 414-15, 42 S.C.t. 114, 66 L. Ed. 284, 21 A. L. R. 1093; Maple Flooring Manufacturers Association v. United States, 268 U.S. 563, 578, 45 S.C.t. 578, 592, 69 L. Ed. 1093.

Third. The Government next contends that the agreements to maintain royalties violate the Sherman Law because the fees charged are onerous. The argument is that the competitive advantage which the three primary defendants enjoy of manufacturing cracked gasoline free of roylty, while licensees must pay to them a heavy tribute in fees, enables these primary defendants to exclude from interstate commerce cracked gasoline which would, under lower competitive royalty rates, be produced by possible rivals. This argument ignores the privileges incident to ownership of patents. Unless the industry is dominated, or interstate commerce directly restrained, the Sherman Act does not require cross-licensing patentees to license at reasonable rates others engaged in interstate commerce. Compare Bement v. National Harrow Co., 186 U.S. 70, 22 S.C.t. 747, 46 L. Ed. 1058; United States v. General Electric Co., 272 U.S. 476, 490, 47 S.C.t. 192, 71 L. Ed. 362. The allegation that the royalties charged are onerous is, standing alone, without legal significance; and, as will be shown, neither the alleged domination, nor restraint of commerce, has been proved.

Fourth. The main contention of the Government is that even if the exchange of patent rights and division of royalties are not necessarily improper and the royalties are not oppressive, the three contracts are still obnoxious to the Sherman Act because specific clauses enable the primary defendants to maintain existing royalties and thereby to restrain interstate commerce. The provisions which constitute the basis for this charge are these. The first contract specifies that the Texas Company shall get from the Indiana Company one-fourth of all royalties thereafter collected under the latter's existing license agreements; and that all royalties received under licenses thereafter issued by either company shall be equally divided. Licenses granting rights under the patents of both are to be issued at a fixed royalty-approximately that charged by the Indiana Company when its process was alone in the field. By the second contract, the Taxas Company is entitled to receive one-half of the royalties thereafter collected by the Gasoline Products Company from its existing licensees, and a minimum sum per barrel for all oil cracked by its future licensees. The third contract gives to the Indiana Company one-half of all royalties thereafter paid by existing licensees of the New Jersey Company, and a similar minimum sum for each barrel treated by its future licensees,-subject in the latter case to reduction if the royalties charged by the Indiana and Texas companies for their processes should be reduced. The alleged effect of these provisions is to enable the primary defendants, because of their monopoly of patented cracking processes, to maintain royalty rates at the level established originally for the Indiana process.

The rate of royalties may, of course be a decisive factor in the cost of production. If combining patent owners effectively dominate an industry, the power to fix and maintain royalties is tantamount to the power to fix prices. National Harrow Co. v. Hench (C. C.) 76 F. 667, affirmed (C. C. A.) 83 F. 36, 39 L. R. A. 299, see also (C. C.) 84 F. 226; Blount Manufacturing Co. v. Yale & Towne Maunfacturing Co. (C. C.) 166 F. 555. Where domination exists, a pooling of competing process patents, or an exchange of licenses for the purpose of curtailing the manufacture and supply of an unpatented product, is beyond the privileges conferred by the patents and constitutes a violation of the Sherman Act. The lawful individual monopolies granted by the patentstat utes cannot be unitedly exercised to restrain competition. Standard Sanitary Manufacturing Co. v. United States, 226 U.S. 20, 33 S.C.t. 9, 57 L. Ed. 107; United States v. New Departure Manufacturing Co. (D. C.) 204 F. 107; United States v. Motion Picture Patents Co. (D. C.) 225 F. 800, appeal dismissed, 247 U.S. 524, 38 S.C.t. 578, 62 L. Ed. 1248. Compare United States v. Kellogg Toasted Corn Flakes Co. (D. C.) 222 F. 725, Ann. Cas. 1916A, 78; United States v. Eastman Kodak Co. (D. C.) 226 F. 62, appeal dismissed, 255 U.S. 578, 41 S.C.t. 321, 65 L. Ed. 795. But an agreement for cross-licensing and division of royalties violates the Act only when used to effect a monopoly, or to fix prices, or to impose otherwise an unreasonable restraint upon interstate commerce. Compare Bement v. National Harrow Co., 186 U.S. 70, 22 S.C.t. 747, 46 L. Ed. 1058; Cement Manufacturers Protective Association v. United States, 268 U.S. 588, 604, 45 S.C.t. 586, 592, 69 L. Ed. 1104; United States v. General Electric Co., 272 U.S. 476, 490, 47 S.C.t. 192, 71 L. Ed. 362; United States v. Trenton Potteries Co., 273 U.S. 392, 397, 47 S.C.t. 377, 71 L. Ed. 700, 50 A. L. R. 989. In the case at bar, the primary defendants own competing patented processes for manufacturing an unpatented product which is sold in interstate commerce; and agreements concerning such processes are likely to engender the evils to which the Sherman Act was directed. Compare United States v. International Harvester Co. (D. C.) 214 F. 987, appeal dismissed 248 U.S. 587, 39 S.C.t. 5, 63 L. Ed. 434. We must, therefore, examine the evidence to ascertain the operation and effect of the challenged contracts.

Fifth. No monopoly, or restriction of competition, in the business of licensing patented cracking processes resulted from the execution of these agreements. Up to 1920 all cracking plants in the United States were either owned by the Indiana Company alone, or were operated under licenses from it. In 1924 and 1925, after the cross-licensing arrangements were in effect, the four primary defendants owned or licensed, in the aggregate, only 55 per cent. of the total cracking capacity, and the remainder was distributed among twenty-one independently owned cracking processes. This development and commercial expansion of competing processes is clear evidence that the contracts did not concentrate in the hands of the four primary defendants the licensing of patented processes for the production of cracked gasoline. Moreover, the record does not show that after the execution of the agreements there was a decrease of competition among them in licensing other refiners to use their respective processes.

No monopoly, or restriction of competition, in the production of either ordinary or cracked gasoline has been proved. The output of cracked gasoline in the years in question was about 26 per cent. of the total gasoline production. Ordinary or straight run gasoline is indistinguishable from cracked gasoline and the two are either mixed or sold interchangeably. Uner these circumstances the primary defendants could not effectively control the supply or fix the price of cracked gasoline by virtue of their alleged monopoly of the cracking processes, unless they could control, through some means, the remainder of the total gasoline production from all sources. Proof of such control is lacking. Evidence of the total gasoline production by all methods, of each of the primary defendants and their licensees is either missing or unsatisfactory in character. The record does not accurately show even the total amount of cracked gasoline produced, or the production of each of the licensees, or competing refiners. Widely variant estimates of such production figures have been submitted. These were not accepted by the master and there is no evidence which would justify our doing so.

No monopoly, or restriction of competition, in the sale of gasoline has been proved. On the basis of testimony relating to the marketing of both cracked and ordinary gasoline, the master found that the defendants were in active competition among themselves and with other refiners; that both kinds of gasoline were refined and sold in large quantities by other companies; and that the primary defendants and their licensees neither individually or collectively controlled the market price or supply of any gasoline moving in interstate commerce. There is ample evidence to support these findings.

Thus it appears that no monopoly of any kind, or restraint of interstate commerce, has been effected either by means of the contracts or in some other way. In the absence of proof that the primary defendants had such control of the entire industry as would make effective the alleged domination of a part, it is difficult to see how they could by agreeing upon royalty rates control either the price or the supply of gasoline, or otherwise restrain competition. By virtue of their patents they had individually the right to determine who should use their respective processes or inventions and what the royalties for such use should be. To warrant an injunction which would invalidate the contracts here in question, and require either new arrangements or settlement of the conflicting claims by litigation, there must be a definite factual showing of illegality. Chicago Board of Trade v. United States, 246 U.S. 231, 238, 38 S.C.t. 242, 62 L. Ed. 683.

Sixth. In the District Court, the Government undertook to prove the violation charged by showing that the three agreements challenged were made by the primary defendants in bad faith. The bulk of the testimony introduced by it, is directed to this issue and relates to the validity and scope of twenty-three jointly-used patents which were selected by it for attack. This evidence was admitted, over objection, for the purpose of showing that these patents were either invalid or narrow in scope; that there was no substantial foundation for the alleged conflicts and threatened infringement suits; that these were a pretext; and that the patents had been secured, and their infringement was being asserted, merely as a means of lending color of legality to the making of the contracts by which competition would inevitably be suppressed. The master found, after an elaborate review of the entire art, that the presumption of validity attaching to the patents had not been negatived in any way; that they merited a broad interpretation; that they had been acquired in good faith; and that the scope of the several groups of patents overlapped sufficiently to justify the threats and fear of litigation. The District Court stated that the particular claims should be interpreted narrowly, and that the respective inventions might be practised without infringement of adversely owned patents. But it confirmed the finding of presumptive validity and did not question the finding of good faith. It held that the patents were adequate consideration for the cross-licensing agreements and that the violation charged could not be predicated on patent invalidity. Inasmuch as the Government did not appeal from these findings, we need not consider any of the issues concerning the validity or scope of the cracking patents; and we accept the finding that they were acquired in good faith. Neither the findings nor the evidence on this issue supply any ground for invalidating the contracts.

Seventh. The remaining issues in the case have become moot. The Government objected to a number of early Indiana Company licenses which contained certain territorial restrictions on the production of cracked gasoline; and also to a provision in the first contract between primary defendants, and in licenses thereunder, by which the Indiana Company secured an option to purchase a portion of the cracked gasoline manufactured in, or shipped into, its sales territory. At the hearing before the District Court it appeared that these provisions had never been enforced. Upon the court's request the objectionable clauses were voluntarily cancelled some months before the entry of the decree. Similarly, the propriety of certain blanket acknowledgments of patent validity in the first contract, and in a number of licenses under later contracts, were questioned by the lower court. At its suggestion, these provisions also were formally cancelled by the parties. As the relief here sought is an injunction, and hence relates only to the future, United States v. Hamburg-Amerikanische Packetfahrt-Actien Gesellschaft, 239 U.S. 466, 475, 36 S.C.t. 212, 60 L. Ed. 387; the alleged validity of such provisions has become moot. Berry v. Davis, 242 U.S. 468, 37 S.C.t. 208, 61 L. Ed. 441; Commercial Cable Co. v. Burleson, 250 U.S. 360, 39 S.C.t. 512, 63 L. Ed. 1030; Alejandrino v. Quezon, 271 U.S. 528, 46 S.C.t. 600, 70 L. Ed. 1071; United States v. Anchor Coal Co., 279 U.S. 812, 49 S.C.t. 262, 73 L. Ed. 971.

Eighth. The District Court accepted the Government's estimates of cracked gasoline production; found that the primary defendants were able to control both supply and price by virtue of their control of the cracking patents; held that although these patents were valid consideration for the cross-licenses, the agreement to maintain royalties was in effect a method for fixing the price of cracked gasoline; and concluded that a monopoly existed as a result of such agreements. This appears to be the only basis for the relief granted. But the widely varying estimates, relied upon to establish dominant control of the production of cracked gasoline were insufficient for that purpose. And the court entirely disregarded not only the fact that the manufacture of the cracked is only a part of the total gasoline production, but also the evidence showing active competition among the defendants themselves and with others. Its findings are without adequate support in the evidence. The bill should have been dismissed.

The Government now seeks no relief against the secondary defendants. It concedes that fifty-three of the seventy-nine contracts, originally set out in the petition, are wholly beyond attack, because they are licenses issued to secondary defendants prior to the execution by their licensors of the three main agreements challenged. As to the remaining contracts between primary and secondary defendants, the Government on this appeal agreed that the decree should be modified to declare such contracts voidable at the opion of the licensees. This modfica tion was assented to at the bar by counsel for the primary defendants. But as we are of the opinion that the decree should be reversed and the bill dismissed, we see no occasion for interfering with the present license arrangements.

Reversed.

Mr. Justice STONE took no part in the consideration or decision of this case.