HANDGARDS, INC., a corporation, Plaintiff-Appellee, v. ETHICON, INC., a corporation, Defendant-Appellant.
No. 76-3150
United States Court of Appeals, Ninth Circuit
May 3, 1979
As Modified on Denial of Rehearing and Rehearing En Banc July 27, 1979
601 F.2d 986
Maxwell M. Blecher (argued), Blecher, Collins & Hoecker, Joel R. Bennett, Kendrick, Netter, Orr & Bennett, Los Angeles, Cal., Morrison & Foerster, San Francisco, Cal., for plaintiff-appellee.
Before SNEED and KENNEDY, Circuit Judges, and VON DER HEYDT,* District Judge.
SNEED, Circuit Judge.
Ethicon appeals from a judgment rendered after a civil jury trial in which it was found guilty of violating
I.
Factual Background
It is helpful to set forth a brief description of the patent enforcement conduct which forms the basis for Handgards’ antitrust complaint before reviewing the history of the instant action.
A. The Prior Patent Enforcement Conduct.
The plaintiff-appellee Handgards, Inc. is a Nebraska corporation engaged in the business of manufacturing, distributing, and selling disposable plastic gloves adhered to paper. Handgards was formed from the 1966 merger of two constituent disposable plastic glove manufacturers: Plasticsmith, Inc. (Plasticsmith) and Mercury Manufacturing Company (Mercury). The defendant-appellant Ethicon, Inc. is a wholly-owned subsidiary of Johnson & Johnson and is engaged in the business of manufacturing, selling, and distributing surgical supplies. Prior to 1969, Ethicon manufactured, distributed, and sold disposable plastic gloves adhered to paper through its Arbrook division. Ethicon ended its participation in the disposable plastic glove business in 1969, when the assets of its Arbrook division were transferred to another Johnson & Johnson subsidiary named Arbrook, Inc.
In 1961 Ethicon acquired the assets of the Scott Company, which, for several years, had marketed disposable plastic gloves produced in accordance with a process developed by one of its founders, Joe Gerard. In so doing, Ethicon acquired both Gerard‘s pending application for a patent on his glovemaking process, as well as his glovemaking equipment.1 In 1961 Ethicon also acquired the pending patent application of one Rene Orsini.2 On April 3, 1962, the Gerard patent covering a glovemaking process issued to Ethicon. On October 20, 1964, the Orsini product patent covering a heat-sealed glove issued to Ethicon.
Both Plasticsmith and Mercury were engaged in the manufacture of heat-sealed disposable plastic gloves at the time the Gerard patent issued in 1962. After several months of unproductive negotiations concerning a licensing agreement for the Gerard patent between Ethicon and T. Hamil Reidy, the chief executive officer and controlling shareholder of Plasticsmith and Mercury, Ethicon filed patent infringement suits in October 1962 against both Plasticsmith and Mercury, alleging infringement of the Gerard patent.3 In December 1964, after the Orsini patent issued, Ethicon supplemented its patent infringement complaints against Plasticsmith and Mercury by adding a claim that the Orsini patent also was being infringed.
In 1966 Plasticsmith and Mercury were merged into a successor corporation, Handgards, Inc., the plaintiff in this case. Reidy continued as the chief executive officer and controlling shareholder in Handgards. In 1967, after learning that some of the allegedly infringing machines operated by Handgards reportedly were owned by Reidy rather than by Handgards or either of its predecessor corporations, Ethicon filed an infringement action against Reidy individually at his Chicago, Illinois residence. Reidy thereafter voluntarily intervened in the consolidated action then pending in California.
The consolidated patent infringement suit was tried to the court in 1968. Ethicon‘s trial counsel dropped the claims con-
B. History of the Present Action.
Plaintiff-appellee Handgards filed this civil antitrust action in 1968 seeking to recover treble damages and other equitable relief for the injuries it claimed to its business and property by virtue of the alleged antitrust violations committed by defendant-appellant Ethicon and defendant Johnson & Johnson. The gist of the plaintiff‘s complaint was that the parent-subsidiary defendants had either unilaterally or in concert, monopolized, attempted to monopolize, and conspired to monopolize trade and commerce for the purpose of eliminating plaintiff as a competitor in the sale of disposable plastic gloves to the hair care and medical markets.
Plaintiff altered its primary theory of recovery dramatically during the eight year period between the time it commenced this action and the time of trial in 1976. Handgards’ suit began primarily as a Walker Process case, i. e., a suit alleging antitrust liability for the enforcement of a fraudulently obtained patent (Orsini).6 See Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965). This theory ultimately proved not viable.7 In 1975 Handgards expressly abandoned the Walker Process theory at a hearing on a motion for summary judgment and instead asserted the two theories on which this case ultimately was tried: the first was referred to at trial as the “overall scheme” theory; the second was referred to as the “bad faith” theory. The district court‘s published opinion on the motion for summary judgment reflected the new orientation of plaintiff‘s case. Handgards, Inc. v. Johnson & Johnson, 413 F. Supp. 921 (N.D.Cal.1975).
Plaintiff charges that defendants attempted to create a monopoly in the disposable glove industry by accumulating a number of the relevant patents—no matter how weak or narrow—and then instigating a series of lawsuits in order to slowly litigate the competition out of business.
The bringing of a series of ill-founded patent infringement actions, in bad faith, can constitute an antitrust violation in and of itself if such suits are initiated or pursued with an intent to monopolize a particular industry (and, of course, the other elements of a
The court defined the term “bad faith” in this context as knowing that the particular patent was invalid because (i) Ethicon allegedly knew (through its agent Gerard) of relevant prior art existing more than a year before the filing of the Gerard patent application; (ii) Ethicon allegedly knew (through its agent Gerard) that the invention had been on sale more than a year prior to the filing of the Gerard patent application; or
At the trial the parties presented dramatically different versions of the facts to the jury. Plaintiff contended that Ethicon had accumulated the Orsini and Gerard patents, two key patents in the field, intending to monopolize the industry; that Ethicon had initiated and pursued its patent infringement suits against Handgards and its predecessors in bad faith, i. e., with knowledge that the patents were invalid, for the purpose of monopolizing the market; that even if brought in good faith, Ethicon‘s infringement suits constituted individual predatory acts in an overall scheme to monopolize; and that Ethicon had generated adverse publicity regarding its infringement actions, threatening potential customers of the plaintiff,8 with the result that vital corporate resources were committed to defense of the infringement actions, Handgards’ relations with potential customers were impaired, a proposed joint venture was aborted, and the company found itself unable to obtain outside financing necessary for it to remain competitive in the industry. Defendant Ethicon countered by arguing that it lacked any improper monopolistic motive in its acquisition of the Gerard and Orsini patents; that it had initiated the various infringement actions in complete good faith, after careful investigation,
The jury returned a general verdict in favor of Handgards in the amount of $2,073,000 prior to trebling and gave the following responses to the special interrogatories submitted in the case: (1) the Orsini patent was not invalid on the basis of prior disclosures of another patent; (2) the relevant market in the case consisted of the market of heat-sealed plastic gloves sold to manufacturers of home hair care coloring kits; (3) Ethicon was guilty of monopolizing or attempting to monopolize the relevant market by prosecuting the patent lawsuits against Handgards and its predecessors in bad faith, that is, with actual knowledge that either the Gerard or the Orsini patent was invalid;9 (4) Ethicon was guilty of monopolizing or attempting to monopolize the relevant market by prosecuting the prior patent action as a predatory act in an overall scheme designed to exclude Handgards from the market; and (5) & (6) Ethicon and Johnson & Johnson were not guilty of entering into an agreement, combination, or conspiracy to restrain trade or to monopolize the relevant market.
II.
Antitrust Liability for Patent Enforcement Conduct.
A. The Problem.
We are confronted in this case with the complex interaction between two conflicting bodies of law: One, the patent law, is concerned with the creation and commercial exploitation of a statutory grant of monopoly power; the other, the antitrust law, is concerned with proscribing various kinds of monopoly power.10 Reconciling the interrelationship between the patent and antitrust laws has long been a topic of concern to courts as well as to commentators. See, e.g., Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965); Rex Chainbelt, Inc. v. Harco Products, Inc., 512 F.2d 993 (9th Cir.), cert. denied, 423 U.S. 831 (1975); Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th Cir.), cert. denied, 344 U.S. 837 (1952); P. Areeda & D. Turner, III Antitrust Law ¶ 704a, at 114-15 (1978); L. Sullivan, Handbook of the Law of Antitrust § 181 (1977); and Stedman, Patents and Antitrust—The Impact of Varying Legal Doctrines, 1973 Utah L.Rev. 588. This case presents yet another instance in which the boundaries of the patent-antitrust interface must be determined.
The problem, as we see it, is to provide the means whereby the bad faith infringement action can be identified post hoc with a sufficiently high degree of certainty to make it highly improbable that the action in fact was brought in good faith. The imposition of treble damages, a sanction strongly punitive, see Walker Process, supra, 382 U.S. at 180 (Harlan, J., concurring) and P. Areeda & D. Turner, supra, II Antitrust Law ¶¶ 311, 331, dictates that such means exist. For reasons which appear below the solution of this problem points the way to the proper disposition of this case.
B. The Solution.
Our search for a solution commences by distinguishing the facts of this case from those of the cases on which appellee Handgards primarily relies. First, this is not a Walker Process case. Walker Process stands for the proposition that “the enforcement of a patent procured by fraud on the Patent Office” may give rise to antitrust liability. See notes 6 & 7 supra. Plaintiff Handgards does not contend that Ethicon sought to enforce a fraudulently-procured patent. Instead, Handgards asserts that Ethicon prosecuted infringement actions in bad faith, that is, with knowledge that the patents, though lawfully-obtained, were invalid.
Second, this is not a Kobe case. Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th Cir.), cert. denied, 344 U.S. 837 (1952). In Kobe a patentee had engaged in a plan of monopolization by acquiring all present and future patents relevant to an industry, obtaining covenants not to compete from those from whom it purchased the patents, publicizing its infringement suits throughout the industry, and threatening suit against anyone trading with the alleged infringer. Kobe and its progeny, among which is Rex Chainbelt, supra, hold that a patentee may incur antitrust liability for even the good faith prosecution of a valid patent where it is shown that the infringement suit “was brought in furtherance and as an integral part of a plan to violate the antitrust laws.” Rex Chainbelt, supra, 512 F.2d at 1005-06.14 Our careful examination of the record in this case reveals that no evidence of any overall scheme to monopolize exists apart from allegations that directly relate to the bad faith prosecution charges. The old wine in this case consists of evidence indicating that Ethicon may have brought the infringement actions in bad faith. It is the same old wine when put in a new bottle labelled “overall scheme.”15
Rather, this case involves simply the commencement and maintenance of related infringement actions in what the jury found to be bad faith.
A clash between the policies of patent and antitrust laws also was present in Walker Process and Kobe. In the former the compromise consisted of erecting high barriers to success by the antitrust plaintiff. As we noted in Cataphote Corp. v. DeSoto Chemical Coatings, Inc., 450 F.2d 769 (9th Cir. 1971), cert. denied, 408 U.S. 929 (1972):
The patent fraud proscribed by Walker is extremely circumscribed. In Walker the Supreme Court excluded from its definition of fraud “an honest mistake as to the effect of prior installation upon patentability—so-called ‘technical fraud.‘” Walker, supra, [382 U.S.] at 177. Wholly inadvertent errors or honest mistakes which are caused by neither fraudulent intent or design, nor by the patentee‘s gross negligence, do not constitute fraud under Walker. . . . The road to the Patent Office is so tortuous and patent litigation is usually so complex, that “knowing and willful fraud” as the term is used in Walker can mean no less than clear, convincing proof of intentional fraud involving affirmative dishonesty, “a deliberately planned and carefully executed scheme to defraud . . . the Patent Office.” . . . Patent fraud cases prior to Walker required a rigorous standard of deceit. . . . Walker requires no less.
450 F.2d at 772 (emphasis added) (footnote and citations omitted). See SSP Agricultural Equipment, Inc. v. Orchard-Rite Ltd., 592 F.2d 1096 at 1103 (9th Cir. 1979).
In overall scheme cases such as Kobe, courts require proof of an overall scheme to monopolize independent of the mere commencement of an infringement suit before permitting the imposition of antitrust liability based on patent enforcement conduct. This requirement diminishes the specter of antitrust liability encountered by an ordinary patentee who brings an infringement action. See Hibner, Litigation as an Overt Act—Development and Prognosis, 46 Antitrust L.J. 718, 720 (1977).
The common thread is that in both Walker Process and Kobe barriers were erected to prevent frustration of patent law by the long reach of antitrust law. This suggests our proper course. It is to erect such barri-
A proper barrier is, in our opinion, suggested by Walker Process. It is that the jury should be instructed that a patentee‘s infringement suit is presumptively in good faith and that this presumption can be rebutted only by clear and convincing evidence. See Cataphote Corp., supra, 450 F.2d at 772; SSP Agricultural Equipment, supra. Such an instruction accords the patentee a presumption commensurate with the statutory presumption of patent validity set forth in the patent laws,
The trial court in this case, however, gave no such instruction. See note 15 supra. Moreover, it charged that the patentee‘s subjective bad faith need only be proved by a mere preponderance of the evidence. This constitutes reversible error. The district court charge eliminates a barrier we hold necessary, and were it accepted as proper, “might well chill” legitimate patent enforcement efforts “because of fear of the vexations or punitive consequences of treble-damage suits.” Walker Process, supra, 382 U.S. at 180 (Harlan, J., concurring).
The barrier we impose is not one intended to be utilized in antitrust litigation generally. It is fashioned in response to the unique characteristics of proceedings in which the alleged violation of the antitrust law consists solely of one or more infringement actions initiated in bad faith.
III.
Damages Recoverable By Victims of Bad Faith Infringement Actions.
Difficulty also exists with respect to the trial court‘s charge to the jury con-
[For] plaintiffs to recover treble damages . . . they must prove more than injury causally linked to . . . [the antitrust violation]. Plaintiffs must prove antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendant‘s acts unlawful. The injury should reflect the anticompetitive effect either of the violation or of anticompetitive acts made possible by the violation. It should, in short, be “the type of loss that the claimed violations . . . would be likely to cause.” Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. [100] at 125.
429 U.S. at 489 (emphasis in original) (footnote omitted).
Plaintiff must show that the injury for which it seeks to recover is “the type the antitrust laws were intended to prevent” and “flows from that which makes defendant‘s acts unlawful.” In a suit alleging antitrust injury based upon a bad faith prosecution theory it is obvious that the costs incurred in defense of the prior patent infringement suit are an injury which “flows” from the antitrust wrong. Damages for the loss of profits, however, will not necessarily so flow. We have some doubt, for example, whether plaintiff‘s damage claim for lost profits allegedly resulting from the entry of an additional competitor into the market during the pendency of the infringement suit is the type of injury for which antitrust recovery is appropriate. “The antitrust laws . . . were enacted for ‘the protection of competition, not competitors.‘” Brunswick, supra, 429 U.S. at 488 (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962)). Moreover, the jury‘s finding in this case that Ethicon possessed a valid patent covering the market it was accused of monopolizing also raises doubts concerning whether plaintiff‘s lost profits “flowed from” the antitrust wrong claimed in this case.
The court‘s charge concerning the damages available to plaintiff for lost profits is ambiguous. Several times the court stated that plaintiff could only recover for lost profits that it would have earned “but for” the antitrust violation by the defendant. See Reporter‘s Transcript at 2160, 2162. The court also stated however, that plaintiff could recover as damages profits lost as the “proximate result” of the antitrust violation. Id. at 2163. The court earlier had defined the term “proximate cause” to mean “an act . . . [that] played a substantial part in bringing about” the injury. Id. at 2161. According to Brunswick, plaintiff must show more than that it suffered injury causally linked to the antitrust violation; the injury must be shown to have “flowed” from the wrong. To “flow” from the wrong, Brunswick suggests, the loss must be “the type of loss that the claimed violations . . . would be likely to cause.” 429 U.S. at 489, quoting from Zenith Radio Corp. v. Hazeltine Research, 395 U.S. 100, 125 (1969). To be one of several causes is not enough. The injury must be of the type likely to be caused by the defendant‘s bad faith infringement action. On the record before us we are left in doubt whether the Brunswick test has been met with respect to plaintiff‘s claim for lost profits. The failure of the trial court to resolve this doubt specifically constitutes error.
IV.
The Reasonable Balance.
The additional burdens imposed by our holdings on those who seek an antitrust
Accordingly, this case is reversed and remanded to the district court for a new trial in accordance with the views expressed herein.
REVERSED and REMANDED.
Each party to this appeal shall bear its own costs and neither party‘s costs shall be taxed against the other. Rule 39, F.R.App. P.
On Petition for Rehearing.
KENNEDY, Circuit Judge, concurring:
I concur in the result of Judge Sneed‘s opinion, and think it inappropriate to address the question whether or not Ethicon could rely on an immunity granted to antitrust defendants under the principles set forth in Franchise Realty Interstate Corp. v. San Francisco Local Joint Executive Board of Culinary Workers, 542 F.2d 1076 (9th Cir. 1976), cert. denied, 430 U.S. 940 (1977). The matter was not raised by Ethicon at any stage of these proceedings. Since a new trial is required in this case, because of the erroneous jury instructions noted by the majority, the district court in the first instance should determine whether Ethicon may raise the question on retrial.
In Franchise Realty we held that an antitrust plaintiff must plead that the litigation or petitions which allegedly caused competitive injury were sham proceedings, the showing required by a line of Supreme Court decisions, see Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); United Mine Workers v. Pennington, 381 U.S. 657 (1965); California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508 (1972); Otter Tail Power Co. v. United States, 410 U.S. 366 (1973); Vendo Co. v. Lektro-Vend Corp., 433 U.S. 623 (1977). Franchise Realty might be interpreted to require dismissal of antitrust claims unless the plaintiff can show that the defendant‘s conduct was designed to cause competitive injury by exacting such extraordinary costs that meaningful use of an agency or tribunal was barred, see 542 F.2d at 1080-81 & n. 4, and perhaps to require further that the defendant must have engaged in conduct other than instigation and maintenance of the proceedings, see id. See also Wilmorite, Inc. v. Eagan Real Estate, Inc., 454 F. Supp. 1124 (N.D.N.Y.1977); Ernest W. Hahn, Inc. v. Codding, 423 F. Supp. 913 (N.D.Cal.1976). Whether this is a correct interpretation of Franchise Realty or the
The majority opinion seems to suggest that a showing of sham proceedings under Franchise Realty is not required where the claimed antitrust injury flows from patent litigation, but it does not indicate the respects in which patent litigation somehow presents a greater threat to interests protected by the
Finally, the majority states that in proving injury “flowing from” an antitrust violation, “To be one of several causes is not enough.” To the extent this language suggests a change in the normal standards regarding causation in antitrust cases, the statement is unexplained. There is no need in this case to reexamine the rule that “proximate cause” in antitrust cases is defined in terms of “a substantial cause.” See Mulvey v. Samuel Goldwyn Productions, 433 F.2d 1073, 1075 n.3 (9th Cir. 1970); Hecht v. Pro-Football, Inc., 570 F.2d 982, 996 (D.C.Cir. 1977); Billy Baxter, Inc. v. Coca-Cola Co., 431 F.2d 183, 187 (2d Cir. 1970); E. Devitt & C. Blackmar, Federal Jury Practice and Instructions §§ 80.31, 80.18 (1977) (“proximate cause” in antitrust cases defined in terms of “substantial factor“). To the extent the language applies only to antitrust claims based on prior patent infringement actions, the majority similarly does not explain why a different causation rule is appropriate in this kind of case. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977), is squarely in point for our holding that the injury must result from a competitive wrong prohibited by the antitrust laws, but in my view it should not be interpreted to introduce a new standard for proving causation either in antitrust cases generally or antitrust claims based on prior patent litigation. I am not as sure as Judge Sneed that part of Handgards’ damages claim was for lost profits resulting from the entry of an additional competitor, but I agree that the effect of the Orsini patent on plaintiff‘s claim of injury creates an issue which the district court should decide.
Notes
Mr. Campbell, a past employee of Glore Forgan, also testified that his company would not become involved in underwriting the sale of Handgards’ stock, because of the pendency of the infringement suit. Mr. Webbe also testified as to the reluctance of Sam Porter to enter into a joint venture because of the pending suit. And Porter, similarly, testified regarding his concern over the infringement action. The defendants presented the following evidence to refute the plaintiff‘s claim that the patent suits were brought as part of an overall scheme to monopolize. Messrs. Laff and Neuman both testified that the patent actions were filed against Plasticsmith and Mercury Manufacturing because Ethicon was unsure of the relationship between the two companies. Mr. Laff explained that Delaware was chosen as the place to sue, because it was more convenient for Ethicon; and that after the court ordered the case transferred to San Francisco, Ethicon did not oppose the consolidation of the lawsuit against Mercury, so the action could be tried as one lawsuit. Messrs. Laff and Neuman testified that the lawsuit was begun against Mr. Reidy when it was learned that Mr. Reidy paid for some of the accused machines. The evidence shows Ethicon offered Handgards a license under the Gerard patent prior to the lawsuit. Mr. Webbe and Mr. Blatz have testified that in their opinion the license offered was not reasonable, and would have put Handgards at a competitive disadvantage. Messrs. Laff, Neuman, and Schlemmer, testified that the letter from Mr. Gerard to Mr. Porter, dated March 16th, 1965, in which Mr. Gerard enclosed a copy of his patent, did not constitute a misuse of the Gerard patent. The evidence shows that as of at least the date of that letter, all disposable plastic gloves purchased by hair care kit companies were manufactured under the Gerard process. Mr. Gerard and Mr. Porter testified that the letter was sent at the specific request of Mr. Porter. Messrs. Laff, Neuman, and Schlemmer testified that no one except a manufacturer of gloves could have been sued under the Gerard patent, which was the sole object of that letter. Id. at 2114-16. As we indicated in the text, our review of the record convinces us that only the bad faith theory of recovery exists in this case. The evidence of an overall scheme to monopolize the relevant market constitutes substantially the same evidence relied upon to show Ethicon‘s alleged bad faith prosecution conduct. If this evidence, under the instructions our opinion requires, should fail to support the bad faith theory, it should not be sufficient to support the overall scheme theory. To hold otherwise would undercut the protections we here seek to afford the ordinary patentee. For this reason we are unable to affirm the judgment below on the basis of the jury‘s finding that an overall scheme existed. It is unnecessary for us to address explicitly the issue whether the trial court erred in charging the jury on two theories. It is enough to point out that if on retrial the evidence remains substantially the same, the charge to the jury should reflect only the bad faith theory. We express no opinion on the type of additional evidence that would require an overall scheme charge. Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th Cir.), cert. denied, 344 U.S. 837 (1952) is the archetype, however.