able through the private law of contracts or the law of torts. Section 301 will fulfill that need and assure that the patent laws are not improperly applied so as to exclude such protection in situations where contract or tort law is indicated. The need for Section 301 is important to the independent or relatively small researcher or developer of technical know-how and to large companies as well. At any level of operations the property rights which may be affected by that provision are of tremendous importance in the development and use of American technology. For example, a common occurrence are agreements entered into between domestic and foreign entities which involve, among other things, the transfer of technological information-important details of a process or product for which the recipient is willing to pay substantial sums of money. In 1968 the United States' technological balance of payments for agreements to exchange such technical information credited our country with 11⁄2 billion dollars. In the absence of a law such as Section 301 provides such technical agreements might be outlawed as being preempted by the patent statutes. But the patent laws would afford insufficient protection for the subjects of those agreements as they may consist almost exclusively of non-patentable technical know-how. Thus, the net effect would be to put an end to the exchange of information and payments therefor now represented by those agreements, for in the absence of adequate protection few persons or companies would want to chance disclosing their know-how and few would want to pay for acquiring know-how that anyone may duplicate with impunity. REPORT OF THE PRESIDENT'S COMMISSION ON THE PATENT SYSTEM XXII The licensable nature of the rights granted by a patent should be clarified by specifically stating in the patent statute that: (1) applications for patents, patents, or any interests therein may be licensed in the whole, or in any specified part, of the field of use to which the subject matter of the claims of the patent are directly applicable, and (2) a patent owner shall not be deemed guilty of patent misuse merely because he agreed to a contractual provision or imposed a condition on a licensee, which has (a) a direct relation to the disclosure and claims of the patent, and (b) the performance of which is reasonable under the circumstances to secure to the patent owner the full benefit of his invention and patent grant. This recommendation is intended to make clear that the "rule of reason" shall constitute the guideline for determining patent misuse. There is no doubt, in the opinion of the Commission, of importance to the U.S. economy of both the U.S. patent system and the antitrust laws. Each is essential and each serves its own purpose within the framework of our economic structure. However, conflicts between the two have arisen. But this does not mean that the two systems are mutually exclusive, that a strong patent system is a threat to the antitrust laws, or that the latter cannot be effectively enforced so long as a patent system grants limited monopolies. On the contrary, the two systems are fully compatible, one checking and preventing undesirable monopolistic power and the other encouraging and promoting certain limited beneficial monopolies. In this way, each may easily achieve its objectives in a strong economy. The Commission, therefore, does not favor any proposal which would weaken the enforcement of the antitrust laws or which would curtail in any way the power of the courts to deny relief to a patent owner misusing the patent he seeks to enforce. However, uncertainty exists as to the precise nature of the patent right and there is no clear definition of the patent misuse rule. This has produced confusion in the public mind and a reluctance by patent owners and others to enter into contracts or other arrangements pertaining to patents or related licenses. No useful purpose would be served by codifying the many decisions dealing with patent misuse into a set of rules or definitions permitting or denying enforceability of patents in given circumstances. The risk of unenforceability is too great and such a codification is wholly unnecessary. All that the Commission believes to be required is explicit statutory language defining, for the purpose of assignments and licenses, the nature of the patent grant heretofore recognized under the patent statute or by decisional law. This is, the right to exclude others from making, using and selling the patented invention. The mere exercise, conveyance or license of these conferred rights should not in itself constitute misuse of a patent. A patent owner should not be denied relief against infringers because he either refused to grant a license or because he has exercised, transferred or licensed any of the conferred patent rights himself. This should not include immunity of even these conferred patent rights from the antitrust laws when the patent owner becomes involved in a conspiracy to restrain or monopolize commerce, or when the patent is itself used as an instrument for unreasonably restraining trade. There are also a number of conditions and provisions long associated with the transfer or license of rights under patents which must be distinguished from the exclusive right to make, use and sell conferred by the patent grant. Among these are improvement grant-backs, cross licenses, package licenses, patent pools, no contest clauses, and many others which are simply matters of private contract, ancillary to the conveyance or license of a patent right. As such, these conditions and provisions must be judged, along with other purely commercial practices, under the antitrust laws and the patent misuse doctrine. The Commission does not recommend immunization of any of these other provisions or conditions from either the antitrust laws or the application of the misuse rule. This recommendation also makes it clear that a patent may not be used to control commerce in subject matter beyond the scope of the patent. For example, it could not be considered "reasonably necessary" to secure full benefit to the owner of a machine patent that he attempt to control any of the commerce in an unpatented raw material to be used in the machine. Neither could it be held that such an attempt had a direct relation to the machine claims in his patent. By the same standards, the patent owner could not control commerce in one of the unpatented elements of his combination invention where his claims are to the whole combination. AMERICAN BAR ASSOCIATION, Re: S. 2756 For the general revision of the patent laws. Chairman, Subcommittee on Patents, Trademarks, and Copyrights, Judiciary DEAR SENATOR MCCLELLAN: As Chairman of the Patent, Trademark & Copyright Section of the American Bar Association, I am enclosing a brief prepared by members of our Section which illustrates why it is of the utmost importance to include Recommendation XXII of the President's Commission on the Patents System as a Section of the above bill or in any revision thereof. The brief sets forth legislative language which paraphrases Recommendation XXII, and this language has been approved by our Section and the House of Delegates of the American Bar Association. The executive branch of the government, as represented by the Department of Justice and the Judicial branch in decisions by the Courts involving both private litigation and litigation in which the Department of Justice has been involved, have created great uncertainty in the law with respect to patent licensing. We submit that the legislative branch should now take the lead, fortified as it is, by Recommendation XXII of the Presidential Commission to provide a statutory expression of a standard to aid business men, private inventors and the general public in the patent licensing area. We have, of course, noted the position of the Department of Justice, as indicated in a letter to you from assistant Attorney General McLaren, which appeared in the Congressional Record. It should not be left to the Justice Department to establish the law of patent licensing case by case, as proposed by Mr. McLaren. This would be an abdication in this area of the rights and duties of the legislative branch. The difficulty with the reasoning of the Justice Department is that it always has its sights set on the big company. It completely overlooks "the little man from Little Rock." There are many individuals and small companies who have patents, and often the best and only way for them to benefit from the patent system is to license their patents. Very few companies, for example, would take a non-exclusive license from an individual, since in practically all cases, the licensee company must spend several hundred thousand dollars to redesign and test the product to meet the commercial demands of the market. This a company is not willing to do if competitors are also licensed, particularly upon the same terms and in the same field of use. A statutory provision defining the metes and bounds of patent licensing such as is proposed in the attached brief, would protect these little men by providing guidelines under which they can operate. The big company can survive under the approach proposed by the Justice Department. The little man cannot, and he needs a statutory mandate under which he can be advised that he is proceeding legally. We could have included numerous other examples of cases in the attached brief where the decisions of the Courts have left the law of patent licensing in a confused state. However, we appreciate that your time and that of your committee is limited and believe our short brief clearly illustrates the problem and points up the necessity for legislation in the patent licensing field. I trust the enclosed will be of help to you. MERL SCEALES, A NEED EXISTS FOR ADDITIONAL STATUTORY PROVISIONS IN I. INTRODUCTION Chairman. There is much uncertainty in the law of patent licensing and legislative clarification is needed. The confusion in this area of the law was noted by the President's Commission on the Patent System which reported: *** uncertainty exists as to the precise nature of the patent right. * * * This has produced confusion in the public mind and a reluctance by patent owners and others to enter into contracts or other arrangements pertaining to patents or related licenses.1 As a suggestion for reducing the confusion and bringing some certainty to the law of patent licensing, the President's Commission offered Recommendation XXII which stated: The licensable nature of the rights granted by a patent should be clarified by specifically stating in the patent statute that: (1) applications for patents, patents, or any interests therein may be licensed in the whole, or in any specified part, of the field of use to which the subject matter of the claims of the patent are directly applicable, and (2) a patent owner shall not be deemed guilty of patent misuse merely because he agreed to a contractual provision or imposed a condition on a licensee, which has (a) a direct relation to the disclosure and claims of the patent, and (b) the performance of which is reasonable under the circumstances to secure to the patent owner the full benefit of his invention and patent grant. This recommendation is intended to make clear that the "rule of reason" shall constitute the guideline for determining patent misuse.2 Recommendation XXII was translated into proposed legislation as Section 263 of the Dirksen bill S. 2597 (90th Congress). Section 263 of the Dirksen bill, which Section has been approved by the American Bar Association, states: 263. Transferable nature of patent rights (a) Applications for patent, patents, or any interests therein may be licensed in any specified territory, in the whole, or in any specified part, of the field of use to which the subject matter of the claims of the patent are directly applicable, and (b) A patent owner shall not be deemed guilty of patent misuse because he agreed to contractual provisions or imposed conditions on a licensee or an assignee which have: (1) A direct relation to the disclosure and claims of the patent, and (2) The performance of which is reasonable under the circumstances to secure to the patent owner the full benefit of his invention and patent grant. 2 Report of the President's Commission on the Patent System, U.S. Government Printing Office (1966). p. 37. 2 Id at p. 36. * Congressional Record-Senate, 90th Congress, p. S15474 (1967). (c) In determining the reasonableness of such provisions or conditions under this section, the courts shall, in each case, consider all factors involved in the exploitation of the patented invention and the economic effect of such provisions or conditions. The most recent patent reform legislation, McClellan S. 2756 (91st Congress) does not, however, include a provision like Section 263. Either Section 263 of Dirksen S. 2597 (90th Congress) or a similar section is needed in patent reform legislation to encourage the licensing of patents by rendering more certain the law governing such transactions. II. REPRESENTATIVE PROBLEM AREAS Some of the principal areas where the law relating to patent licensing is uncertain are: "field-of-use" licensing, royalty collection following patent expiration, package licensing, nonexclusive licenses containing differing royalty rates, grant-back covenants, and setting of royalty rates. A. "Field-of-use" licenses There is present confusion in the law as to whether or not a patent owner may limit the licensed use of his invention to a designated apparatus, process or field of business activity. More particularly, while it has been believed since the 1938 decision of the Supreme Court in General Talking Pictures Corp. v. Western Electric Co. that a patent owner can limit his license under the invention to a particular field (such limitation commonly being referred to as a "fieldof-use" limitation) it now appears that the Department of Justice plans to challenge the legality of "field-of-use" licenses in certain instances where they are issued to a plurality of licensees. Patent owners are thus placed on the horns of a dilemma in as much as they cannot with any certainty grant "fieldof-use" licenses. To grant such licenses would be to invite an action from the Justice Department. B. Collections of patent royalties following patent expiration A further area of concern to patent owners involves the legality of charging a royalty the payment of which is to be spread over a term of years which exceeds the life of the licensed patent. In 1964 the Supreme Court in Brulotte v. Thys Co. held that a license of a single patent which required payment of royalties for a period beyond the expiration date of the patent was an unlawful extension of the patent monopoly and therefore a misuse of the patent. In 1969 the Supreme Court in discussing the Brulotte case has stated: Recognizing that the patentee could lawfully charge a royalty for practicing a patented invention prior to its expiration date and that the payment of this royalty could be postponed beyond that time, we noted that the post-expiration royalties were not for prior use but for current use, and were nothing less than an effort by the patentee to extend the monopoly beyond that granted by law." This is confusing and statutory clarificaton is needed. C. Package licensing The problem of post-expiration royalties discussed in Section II B is also of concern in the licensing of several patents to a single licensee (such licenses being commonly referred to as "package" licenses). Patent owners are presented, in view of the Supreme Court decisions, with the problem of determining whether a package license is unenforceable if the royalty provision does not provide for a decrease in the royalty rate should any of the licensed patents expire during the life of the license agreement. The practice of charging a royalty rate which does not diminish during the life of the agreement, even though some of the licensed patents may expire, was early approved in Automatic Radio Co. v. Hazeltine Research Co. Apparently this practice is 305 U.S. 124. 59 S.Ct. 116 (1938). Address by Richard W. McLaren, PTC Research Institute of George Washington University (June 5, 1969), 161 U.S.P.Q. No. 11. p. II; and address by Roland W. Donnem, Michigan State Bar Convention, Trade Regulation Report (October 7, 1969) pp. A-4 and A-35. 6379 U.S. 29. 85 S.Ct. 176 (1964). Zenith Radio Corporation v. Hazeltine Research, Inc., at 1583 (1969). 8339 U.S. 827, 70 S.Ct. 894 (1950). U.S. 89 S.Ct. 1562 11 still permitted in the tenth circuit, as evidenced by Well Surveys, Inc. v. PerfoLog, Inc. while it is in trouble in the third circuit. More particularly, the third circuit in American Security Co. v. Shatterproof Glass Corp. 268 F.2d 769 (3d Cir. 1959) found patent misuse in a license clause which continued the full royalty rate "to the expiration of the last to expire of any" " of the patents licensed under the agreement. The confusion is further amplified by a statement in majority opinion of the Brulotte case, supra, which distinguished the Hazeltine case, supra, by pointing out that not all of the patents involved in the Hazeltine case were to expire during the period of royalties. Further, as was pointed out in a footnote to the majority opinion in the Brulotte decision, the review petition filed in the Hazeltine case: did not *** raise the question of the effect of the expiration of any of the patents on the royalty agreements.1 Statutory clarification is needed. D. Nonexclusive licenses containing differing royalty rates 12 Recent decisions have held that the owner of a patent could not charge different royalty rates to licensees under the same patent.13 Because of these decisions there is doubt as to the legality not only of a patent owner charging different royalty rates in situations where licensees are involved in the same "field-of-use" but also in those situations where the licensees are involved in different "field-of-use." Clarification on the law with regard to the setting of differing royalty rates for licensees of the same patent is needed. E. Grant-back covenants While it has been believed that a "grant-back" provision in a patent license (such a provision being one which requires that the licensee assign or license back to the licensor any patent or improvement in the products or the processes of the licensed patent) is a legal and valid provision under the doctrine announced in Transparent-Wrap Machine Corp. v. Stokes & Smith Co.,1 at least as long as such grant-back provisions were not linked with any other anticompetitive activity, it now appears that the Justice Department contemplates challenging license agreements containing particular types of grant-back clauses. In order to have any certainty as to whether or not such provisions may be lawfully included in license agreements, statutory clarification of the legality of such provisions is needed. 16 F. Royalties 15 The law is also unclear as to the extent to which the patent owner and his licensee are free to set a mutually agreeable royalty rate. Particularly, while the Supreme Court in the Brulotte case " noted that a patent empowers the owner to exact royalties as high as he can negotiate with the leverage of that patent, the recent case of American Photocopy Equipment Co. v. Rovico 18 held that a patent owner should be denied a preliminary injunction against infringement of his patent because in the court's opinion the patent had been misused as the royalty rate was exorbitant and oppressive. How can an attorney advise his client as to whether or not a royalty rate is exorbitant and oppressive? Statutory clarification is needed. III. STATUTORY TREATMENT OF THE ABOVE PROBLEMS Only Section 263 of the Dirksen bill S. 2597 (90th Congress) and the 91st Congress' version thereof, S. 1569, has treated any of the problems discussed 396 F. 2d 15 (10th Cir. 1968), cert. denied 393 U.S. 951. See McCullough Tool Co. v. Well Surveys, Inc., 343 F. 2d 381 (10th Cir. 1965), cert. denied 383 U.S. 933. 10 268 F. 2d 769 (3d Cir. 1959). 11 Id at 777. 12 379 U.S. at 32. 13 Laitram Corp. v. King Crab, Inc., 244 F. Supp. 9 (D.C. Alaska 1965), motion for new trial denied, 245 F. Supp. 119 (1965); U.S. v. United Shoe Machinery Corp., 110 F. Supp. 295 (D.C. Mass. 1953); Peelers Company v. Wendt, 260 F. Supp. 193 (D.C. Wash. 1966); and Barber Asphalt Corp. v. La Fera Grecco Contracting Co., 116 F. 2d 211, (3d Cir. 1940). 14 329 U.S. 637, 67 S.Ct. 610 (1947). 15 U.S. v. General Electric, 80 F. Supp. 989 (D.C. N.Y. 1948). U.S. v. General Electric, 82 F. Supp. 753 (D.C. 1940); U.S. v. Alcoa, 91 F. Supp. 333 (S.D. N.Y. 1950); and Kobe, Inc. v. Dempsey Pump Co., 198 F. 2d 416 (10th Cir. 1952). 16 Address cited note 4 supra. 17 379 U.S. 827. 70 S.Ct. 804 (1950). 18 350 F. 2d 745 (7th Cir. 1966), cert. denied 385 U.S. 846. |