patent system in a competitive economy. The economic and legal literature abounds in discussions touching on this subject, much of it abstract and centering about application of terms such as "monopoly" to the rights associated with an issued patent.69 The power to exclude conferred by a patent is meaningful in a market context only to the extent that it gives a practical commercial advantage to the patentee. The focal point of the matter is not whether one word or another more aptly describes what the patent may be theoretically said to confer. Rather, our attention should be directed to the competitive impact of particular patents in the particular market settings of which they are a part. We will therefore look to some of the recent judicial decisions shedding light on this subject, bearing in mind that it is only in the context of actual events that analysis of the economic power associated with letters patent can have significance in relation to a competitive economy.

A dramatic illustration of the vigor of product competition incident to the patent system is found in the leakproof dry cell litigation and its aftermath.70 In 1940 Anthony patent 2,198,423 issued to Ray-OVac Co., then a comparatively small manufacturer of dry cells for flashlight and other uses. The patent included broad claims to a dry cell with a "protecting sheet-metal sheath * * * tightly embracing" the cell proper to prevent leakage. Despite its simplicity, the battery was a marked break from past thinking. Previously both the industry and users had accepted the propensity of exhausted cells to swell and leak-as indeed most persons know from sad personal experience. Most manufacturers had applied notices to their flashlight batteries warning of this effect. The Anthony patent construction went far to overcome this problem. Indeed, Ray-O-Vac was able to advertise the new battery as "leakproof" and to guarantee replacement of the entire flashlight if damaged by a leaky cell. The battery was an immediate commercial success. When a competitor adopted the patented construction, Ray-O-Vac brought a patent infringement suit which ultimately resulted in 1944 in affirmance by the Supreme Court of the lower court decisions of patent validity and infringement.72 Ray-O-Vac issued ro licenses, and realized its profits from the patent by way of manufacture of the patented cell, both for sale under its own name and for private brand sale.

The net effect of the Supreme Court decision and the Ray-O-Vac policy was to create a crisis in the industry. The Ray-O-Vac competitors-the leading battery manufacturers-faced an important patent to which they could not gain access. Hard pressed, they turned their attention to the development of noninfringing batteries which they could advertise as leakproof. By 1948 one of the defendants in the

For a collection of the materials see Oppenheim, Cases on Federal Antitrust Laws (1948), p. 464 et seq. On the futility of analysis based on the term "monopoly" compare the following passages: "Though often so characterized, a patent is not, accurately speaking, a monopoly, for it is not created by the executive authority at the expense and to the prejudice of all the community except the grantee of the patent. The term monopoly connotes the giving of an exclusive privilege for buying, selling, working or using a thing which the public freely enjoyed prior to the grant. Thus a monopoly takes something from the people. An inventor deprives the public of nothing which it enjoyed before his discovery, but gives something of value to the community by adding to the sum of human knowledge. 637 per Mr. Justice Roberts in U. S. v. Dubilier, 289 U. S. 178, 186 (1933).

"It is the protection of the public in a system of free enterprise which alike nullifies a patent where any part of it is invalid *** and denies to the patentee after issuance the power to use it in such a way as to acquire a monopoly which is not plainly within the terms of the grant. The necessities or convenience of the patentee do not justify any use of the monopoly of the patent to create another monopoly.***” per Mr. Justice Douglas in Mercoid v. Mid-Continent, 320 U. S. 661, 665 (1944).

70 The Goodyear Tire & Rubber Co. v. Ray-O-Vac Co., 321 U. S. 275 (1944).

71 Claim 1, patent 2,198,423. See also claims 2, 4, and 5.

72 Footnote 70, supra.

litigation had such a battery in quantity production.73 Another competitor had a battery on the market in 1950 for which it gave the same flashlight replacement guarantee that had been emphasized by RayO-Vac in obtaining the patent from the Patent Office and before the courts in securing the favorable decisions." Throughout there has been vigorous competition and effective selling by all manufacturers. When Ray-O-Vac contended that the term "leakproof" was distinctive of its batteries, competitors satisfied the Patent Office that this was not true.75 Ray-O-Vac has moved up in the industry, but it has not enjoyed any broad range freedom from competition in the sale of flashlight batteries. And now-with the patent expiring early in 1957-the company faces not only competition in the manufacture of the patented construction, but also competition based on improvements made by others in efforts to design around the Anthony patent. When we turn to the Linde case 76 -the most recent Supreme Court decision upholding a patent-we find the same pattern within the confines of the case itself. The patent related to a welding flux particularly desirable and unusual in that it permitted welding of plates of great thickness and produced no visible arc during the welding process." The District Court, the Court of Appeals, and the Supreme Court, all held the patent valid and infringed. And in decision on rehearing the Supreme Court in sweeping language adhered to the "doctrine of equivalents" to place a broad construction on the patent claims.79 Yet, by the time the case was again before the district court on remand, the defendant had devised an "unreacted" flux which it sold in competition with the patented flux. This "unreacted" flux was ultimately held to be outside the scope of the patent.so While we cannot here pass judgment on the merits of the "unreacted" flux vis-a-vis the patented flux, the fact that it was sold in competition with the patented flux and was charged as an infringement on the basis that it did the same thing, indicates that the practical differences, if any, were minor.

81

78

The recent Cellophane decision though not a patent infringement action-brings out even more forcefully the limitations on the

7 General Dry Batteries, Inc. et al v. Ray-O-Vac Co., 104 U. S. P. Q. 347 (Comm'r of Patents, 1955). The General Dry Batteries case gives a particularly interesting picture of the developments in the industry after the Supreme Court decision. It arose on an opposition filed by four competitors of Ray-O-Vac to a trademark application to the term "leakproof." Assistant Commissioner Leeds found that the term "leakproof" had acquired no secondary meaning as indicating dry cells made by Ray-O-Vac. In partial support of this conclusion the decision lists a great number of patents directed to "leakproof" dry cells (104 U. S. P. Q. 349-350). Burgess Battery Co. rested its position in the opposition in part on the fact that "Burgess has been for some 10 years engaged in the development, manufacture, and sale of truly leakproof dry cells and batteries" (104 U. S. P. Q. 349).

On May 7 and 8, 1956, the writer purchased flashlight batteries at a number of stores in downtown Chicago. The batteries bore seven different trademarks. Four (Ray-O-Vac, RCA, Sears, and Wards) were manuactured by Ray-O-Vac under the Anthony patent. Three (United States Electric Manufacturing Co., National Carbon Co., and Burgess Battery Co.) were not made under the patent. The United States Electric battery bore patent number 2,410,826, issued in 1946. All of the batteries except the RCA battery bore the same guaranty that a complete new flashlight would be supplied if damaged by the battery. 74 General Dry Batteries, Inc. et al v. Ray-O-Vac Co., 104 U. S. P. Q. 347, 353 (Comm'r of Patents, 1955). 75 Footnote 73, supra.

76 Graver Tank & Mfg. Co. v. The Linde Air Products Co., 366 U. S. 271 (1949), on rehearing (339 U. S. 605 (1950).

77 See 86 F. Supp. 191, 192. The patent in suit also involved a number of claims to a method of welding. These were held invalid by the district court (86 F. Supp. 191, 196, et seq.); held valid by the Court of Appeals (167 F. 2d 531); and held invalid by the Supreme Court (336 U. S. 271).

78 Footnotes 76 and 77, supra.

79 339 U. S. 605 (1950).

80 The district court held that the new flux was an infringement. Union Carbide and Carbon Co. v. Graner Tank & Mfg. Co., 106 F. Supp. 389 (1951). The Court of Appeals reversed at 196 F. 2d 103 (1952). The district court concluded that the new fluxes "are substantially the same with respect to silicates as required by the patent; that such fluxes infringe because the elements in the compositions are, first, substantially the same thing as required by the Jones et al. patent; second, operate substantially the same way; and, third, they substantially accomplish the same results" (106 F. Supp. 393). The Court of Appeals decision rests on disclaimers made earlier by the plaintiff to distinguish the prior art and not on any contrary conclusion as to the similarity of operation.

81 United States v. E. I. du Pont de Nemours and Co., 76 Sup. Ct. 994 (June 11, 1956).

practical economic effect of even a basic patent. It also brings into focus the relationship of the patent system and the antitrust laws in fostering product competition. The case arose on a Government charge that Du Pont had monopolized the business of manufacturing and selling cellophane in violation of section 2 of the Sherman Act. Du Pont entered the industry in 1923 through a secret process license from the French concern La Cellophane. Du Pont promptly undertook a sustained research program to improve the product and to develop its uses. The company enjoyed a sales volume in excess of 75 percent of the cellophane sales in the United States. The only other substantial cellophane producer was Sylvania which, during the pre-1947 period in question, operated under patent license from Du Pont which included provisions for sharply increased royalties for sales in excess of a fixed percentage of Du Pont sales.82 In short, if the case turned on cellophane as a separate commodity insulated from the competition of other products, there were all the earmarks of "monopoly power.'

Nevertheless the district court concluded that Du Pont had not "monopolized" in violation of the Sherman Act. Turning to the test of monopoly power developed by the earlier Sherman Act casespower to fix prices and exclude competitors from the relevant marketthe court concluded that Du Pont lacked such power. Rather, glassine, waxed paper, aluminum foil, pliofilm, polyethylene, saran, Cry-O-Rap, and other materials all competed with cellophane for packaging candy, bread, meats, cigarettes, and other products.83 The record contained instances where customers had shifted from these other materials to cellophane, changed back, and subsequently had shifted to cellophane again.84 In short, Du Pont, faced with the competition of these other flexible packaging materials to which customers could and did turn, could not set a monopolistic price or exclude others from the significant market for flexible packaging materials generally. The majority of the Supreme Court affirmed the district court judgment.85 In answer to the Government contention that the market should include only alternatives that are "substantially fungible with the monopolized product and sell at substantially the same price," the Court pointed to the practical fact that the various flexible packaging materials were "reasonably interchangeable by customers for the same purpose" and hence necessarily were part of the market to be considered in measuring monopoly power.86

The Cellophane decision not only stands as judicial recognition of the significance of product competition under the antitrust laws, but also shows vividly the relationship of patents to such competition. Du Pont's pioneering research did result in the issuance of an important patent-the moistureproof cellophane patent. The district. court characterized the patent as a "basic product patent," as indeed it was in view of the evidence that moistureproof cellophane was the key to the successful development of a market for cellophane

83 United States v. E. I. du Pont de Nemours and Co., 118 F. Supp. 41, 156 (D. Del. 1953). The Sylvania patent license provided for a royalty rate of 2 percent of net selling price until a fixed percentage of the combined annual sales of Du Pont and Sylvania was exceeded, at which time the royalty rose to 20 cents per pound or 30 percent of net selling price, whichever was greater. Actual sales by Sylvania were well below the percentage at which the royalties increased.

Id., pp. 111-114.

4 Id., pp. 200-204.

95 Footnote 81, supra.

and Harlan did not sit.

Chief Justice Warren and Justices Black and Douglas dissented. Justices Clark

Footnote 81, supra, at pp. 1006–1007.

in the United States.87 One would suppose that if ever a patent could give rise to broad economic power, it would have done so in this instance. Yet both the district court and the Supreme Court concluded that Du Pont had not enjoyed monopoly power in the Sherman Act sense, and thus necessarily held that even in connection with Du Pont's position as leading domestic producer of cellophane the patent had failed to confer such power.88 Indeed, in describing what the proofs showed to have actually happened, the district court said: 89

As cellophane got recognition in the trade, others entered various phases of the business as converters, users, suppliers of raw materials, manufacturers of equipment, and the like. Cellophane creates competition. Throughout the flexible packaging markets this competition is felt. It stimulates efforts of other producers to manufacture more efficiently. It stimulates research. The consumption of flexible packaging materials, including cellophane, has grown at a rapid rate. Within these markets the competition is intense. New producers have entered. No one material or one supplier controls-certainly not Du Pont, which has neither the power to raise prices nor to exclude competitors.

It might be added that even if the market is defined narrowly for antitrust purposes-as was done by the dissenting Supreme Court Justices the case still shows that the actual market power attending even the "basic" cellophane patent was closely circumscribed by competing substitutes.

We find another pertinent recent case in Cole v. Hughes Tool Company 90 Here, Hughes had brought action for infringement of three patents to oil well drilling bits. As one defense and basis for counterclaim, Cole argued that Hughes had monopolized the manufacture of such bits in violation of section 2 of the Sherman Act. Again we have a charge of monopolization levied against a company that was a pioneer in the field, had engaged in sustained active research, and enjoyed a position of leadership in the industry. Moreover, Hughes had a litigious history of aggressive enforcement of its patent rights and apparently refused to grant licenses on terms acceptable to competitors. In short, if patent rights based on research were capable of imparting a monopoly position in the industry, Hughes should have acquired such position. Yet when the court examined the activity of competitors, the competing products, and the other facts of the industry, it concluded that "any notion that Hughes controls the market or enjoys a monopoly in the rotary-drilling-bit

91

87 "Validity of these claims and other broad claims contained in the basic-product patent was conceded. They are reinforced by basic and equally valid process patents. There is no proof any moistureproof cellophane could have been or in fact ever was made during the life of the product patent which was not equally covered by its claims. Indeed, this patent covered the entire field of moistureproof cellophane, and its strength and broad coverage was recognized" (118 F. Supp. 41, 214).

"Du Pont's development of moisture proof cellophane was stimulated by du Pont's inability to sell nonmoistureproof cellophane in competition with waxed glassine and waxed paper for wrapping cookies, crackers, candies, biscuits, and baked goods." Finding 94 (118 F. Supp. 41, 76).

88 Since the majority of the Supreme Court found no monopoly power it did not go on to determine whether the patent would form a defense to the monopolization charge, where monopoly power was shown to ext The district court did go into this question and concluded that the patent was alone a defense to the charge. See 118 F. Supp. 41, 213-214.

89 118 F. Supp. 41, 54.

80 215 F. 2d 924 (10th Cir. 1954).

91 See, Chicago Pneumatic Tool Co. v. Hughes Tool Co., 97 F. 2d 945 (10th Cir. 1938); Robertson Rock Bit Co. v. Hughes Tool Co., 176 F. 2d 783 (5th Cir. 1949); Williams v. Hughes Tool Co., 186 F. 2d 278 (10th Cir. 1950); Chicago Pneumatic Tool Co. v. Hughes Tool Co., 197 F. 2d 620 (10th Cir. 1951).

industry is clearly refuted by the record." 92 With regard to bits of one general type, the court observed: 93

***The Hughes bits which have enjoyed the greatest market success are those designed for drilling in the medium and hard formations. There, Hughes comes into competition with cross-roller bits and cone bits of other manufacturers. Diamond bits also come into direct competition with the Hughes bits designed for drilling in the harder formations. Many of the large oil developing companies have ceased to use Hughes bits and are using diamond core bits in certain types of the harder formations for the reason that the diamond core bit drills faster and is more economical, since it is not necessary to pull it out and change bits.

The Glen Raven case 4 illustrates the actual economic power of a patentee in a different setting. The patent in suit was directed to the so-called picture frame heel design for women's hosiery. It was based upon the invention of one Bley who assigned an interest to his partner Spurgeon. The patented stocking enjoyed most impressive commercial success. Spurgeon Hosiery Co., a licensee, had 20 employees in March 1948 when it took a license. Despite a somewhat higher price than that of comparable quality hose, it rapidly expanded to four times its size due to increased sales volume. The Sanson Hosiery Mills, Inc., to which a part interest in the patent was assigned by Bley and Spurgeon, offered the patented stocking in late 1948. Prior to that time. the company was in an unprofitable condition and had reduced its customer accounts to 15 or 20. Within 16 months Sanson's customer accounts rose to 3,981, and in the first year its sales increased from 3,000 dozen pairs a month to 48,000 dozen pairs a month. By the end of 1949 Sanson's stockings were to be found in all of the 48 States, in the Territories and possessions of this country, and in 26 foreign countries. By 1950 its annual sales were estimated at $10 million. When a patent-infringement suit was brought on the Bley patent the defendant contended that the plaintiffs had entered into illegal price-fixing agreements. It was shown that they were selling the patented stockings under "fair trade" resale price maintenance statutes, which in terms permit such price maintenance only with respect to commodities "in free and open competition with commodities of the same general class produced and sold by others." 95 argument was that the resale price maintenance statutes could not apply to the patented stocking because if patented the stocking was of necessity not in the same general class as other stockings. The court rejected this contention with the pragmatic view that "it defies common sense to say that the addition of a design to a stocking takes it out of the same general class of stockings of its competitors." " No discussion of practical length can explore all of the variations of economic power associated with letters patent. The cases discussed above are illustrations of patents which proved to be important competitive instruments. Ray-O-Vac vigorously advertised and emphasized the advantages of its patented battery to increase its share

Footnote 90, supra, at p. 938.

Footnote 90, supra, at p. 939.

Glen Raven Knitting Mills, Inc. v. Sanson Hosiery Mills, Inc., 189 F. 2d 845 (4th Cir. 1951).

The

Id., at p. 854. The statute quoted is the Miller-Tydings amendment to the Sherman Act (50 Stat. 693). Essentially the same language is embodied in the McGuire amendment to the Federal Trade Commission Act (66 Stat. 631).

Footnote 94, supra, at p. 854.