United States v. Line Materials Company/Dissent Burton
Mr. Justice BURTON, with whom THE CHIEF JUSTICE and Mr. Justice FRANKFURTER concur, dissenting.

This dissent is impelled by regard for the soundness, authority and applicability to this case of the unanimous decisions of this Court in Bement v. National Harrow Co., 186 U.S. 70, 22 S.Ct. 747, 46 L.Ed. 1058, and United States v. ,General Electric Co., 272 U.S. 476, 47 S.Ct. 192, 71 L.Ed. 362.

The complaint charges violation of § 1 of the Sherman Anti-trust Act  by the defendant patent owners and cross-licensors, Line Material Company and Southern States Equipment Corporation (here called respectively Line and Southern), and also by the ten defendants who hold licenses under the two complementary patents, owned respectively by Line and Southern. These patents are for dropout fuse cutouts. Southern's patent is the dominant patent but the product made under it alone has not been commercially successful. Line's patent is for an improvement of that product which has made it commercially successful. Each of the twelve defendants has received and exercised authority under both patents to make and sell this improved product, but the Government charges them with having engaged in an unlawful combination and conspiracy in restraint of trade to fix, maintain and control the prices at which they have sold, in interstate commerce, their respective products under these patents. It is not disputed that the sales were made in interstate commerce. The trial court's findings of fact demonstrate, however, that there have been no agreements between any of the defendants wih  respect to the prices of these products other than the price-limiting provisions contained in their respective licenses.  The findings of fact show also that, unless the Government sustains its contention that those provisions constitute, per se, an unlawful restraint of trade, its complaint should be dismissed. 

The question thus presented is: Do the price-limiting provisions in some or all of the licenses under Line's or Southern's patents constitute a restraint of trade in violation of § 1 of the Sherman Act? We agree with the court below that they do not.  The price-limiting provisions in this case are comparable to those which, in the Bement and General Electric cases, supra, were held not to violate the Sherman Act. This Court sustained the agreement in the Bement case because the Sherman Act-'clearly does not refer to that kind of a restraint of interstate commerce which may arise from reasonable and legal conditions imposed upon the assignee or licensee of a patent by the owner thereof, restricting the terms upon which the article may be used and the price to be demanded therefor. Such a construction of the act, we have no doubt, was never contemplated by its framers.' 186 U.S. at page 92, 22 S.Ct. at page 756, 46 L.Ed. 1058.

The license in that case was issued under several patents and, as here, it limited the prices at which the licensee was authorized to sell articles produced by the licensee under that license. In the General Electric case, this Court, in speaking of the patent holder's right to limit the selling prices of his licensee's products, said:

'We think he (the patent holder) may do so provided the conditions of sale are normally and reasonably adapted to secure pecuniary reward for the patentee's monopoly. One of the valuable elements of the exclusive right of a patentee is to acquire profit by the price at which the article is sold.' 272 U.S. at page 490, 47 S.Ct. at page 197, 71 L.Ed. 362.

In the present case, there are two types of license agreements. The price-limiting provisions are the same in each. The first type is that of the cross-licensing agreement between Line and Southern. In it Line granted to Southern a nonexclusive, royalty-free license to make and sell the products here in question. Line also prescribed that Southern's prices, terms and conditions of sale should be 'not more favorable to the customer than those established from time to time and followed by the Line Company in making its sales.' The difference between this license agreement and Line's agreements with each of the other defendants is that Southern, in return for this license, instead of paying cash royalties to Line, issued to Line a limited cross-license under Southern's complementary patent on a dropout fuse cutout. Southern also granted to Line an exclusive right to issue sublicenses under that patent. Southern inserted no price limitation in its cross-license to Line and Line made no commitmen  to insert price limitations in any sublicense which it might issue under Southern's patent. As far as price limitations were concerned, they all were contained in the royalty-free, nonexclusive license from Line to Southern and were applicable only to products made and sold by the latter under Line's patent. Assuming that the limitations thus placed by Line on the price of Southern's products, made and sold by it under Line's complementary patent, were reasonable limitations, especially in relation to Line's own operations under the same patent, they represented a lawful protection of Line's patent interests. They evidenced a normal exercise by a manufacturing patentee 'of the exclusive right of a patentee * * * to acquire profit by the price at which the article is sold.'  In some ways, they were even more natural and reasonable provisions for insertion by Line than would have been a bare provision for royalties. Line evidently needed these price limitations to enable it to continue to make and sell the product which its own improvement had converted from a commercial failure into a commercial success. It will be demonstrated later that Line's receipt of a royalty-free, unconditional cross-license under Southern's complementary patent, as consideration for Line's license to Southern, did not, per se, convert this otherwise lawfully limited license into an invalid license violating the Sherman Act.

The other type of license that was used by Line was that of a direct license issued separately to each of the ten other licensee-defendants. These licenses closely resembled each other. Each was a nonexclusive license calling for the payment of a modest royalty to Line on each product made and sold by the licensee under Line's patent. Each included price limitations comparable to those in Line's license to Southern. These price-limiting licenses from Line are, as such, entirely comparable to those in the Bement and General Electric cases. Each license, however, also included a sublicense issued by Line under Southern's complementary patent. The royalties on the products made and sold under the two complementary patents were to be divided equally between Line and Southern. It will be demonstrated later that this sublicense under Southern's complementary patent and the agreement by Line to divide with Southern the royalties received upon products made and sold under the two patents did not, per se, convert these otherwise lawfully limited licenses into invalid licenses violating the Sherman Act.

Line also granted to certain licensee-defendants desiring it, a license under Line's so-called 'Kyle patent' for enclosed fuse boxes. Some of these licenses carried price limitations on products made and sold by the licensee under the Kyle patent. These licenses are entirely comparable to those in the Bement and General Electric cases. They are well within the scope of those precedents and carry no suggested basis for a distinction claimed to convert them into invalid licenses violating the Sherman Act.

The Government now asks this Court to overrule the Bement and General Electric cases. The opinion by Mr. Justice REED rejects that request but seeks to justify a reversal of the judgment below by distinguishing this case from those precedents. This dissent undertakes not only to emphasize the soundness of the Bement and General Electric decisions, but to demonstrate that the basic principles which sustain those decisions apply to this case with at least equal force. This initial discussion will omit the consideration of the cross-license from Southern to Line, the grant from Southern to Line of the exclusive right to issue sublicenses under the Southern patent and the agreement for the division of royalties between Southern and Line. The Bement and General Electric decisions are authority for upholding the remaining portions of such agreements in te  light of the previously mentioned findings of fact which show that the agreements 'arise from reasonable and legal conditions imposed upon the assignee or licensee of a patent by the owner thereof, restricting the terms upon which the article may be used and the price to be demanded therefor'  and that 'the conditions of sale are normally and reasonably adapted to secure pecuniary reward for the patentee's monopoly.'  This dissent accordingly re-examines the foundation for those decisions and emphasizes the development, nature and effect of the patent rights which are decisive of the main issue both in those cases and in this.

Patent Rights.

An understanding of the historical development and of the nature of patent rights in the United States is essential to a discussion of the relation between them and the restraints of trade prohibited by the Sherman Act. American patent rights find their origin in Great Britain. That nation appears to have been the first to issue 'patents' to secure to inventors for limited times exclusive rights to their respective discoveries. These 'patents' were called 'literae patentes,' i.e., 'open letters,' because they were not sealed up but were exposed to view with the Great Seal pendant at the bottom. They were addressed by the sovereign to all subjects of the realm. Such instruments were, and to a degree still are, the common form used for making grants of dignities, such as peerages, appointments to certain offices and grants of privilege of various kinds. Their form, therefore, was similar to that of the 'patents' used to grant exclusive rights or 'monopolies' to trade guilds, corporations and, in some cases, individuals, permitting them to exclude competitors from the conduct of certain lines of profitable business. 

The contrast between these two kinds of exclusive rights in their relation to the public was reflected later in acts of the British Parliament and in the Constitution and statutes of the United States. A patent to an inventor took nothing from the public which the public or the inventor's competitors already had. By hypothesis, it dealt with a new asset available to civilization only through its inventor. The royal patent served to encourage the inventor to disclose his invention. By granting to the inventor the right to exclude all others from making, using or selling the invention for a limited time, it was felt that the public was well served by the invention's disclosure, its early availability under the patent and its later general availability to everyone. This procedure was popular. On the other hand, royal patents securing exclusive rights to private parties to conduct profitable enterprises to the exclusion of existing or available competitors were issued to show royal favor or to secure funds at the expense of the public. Such patents became highly unpopular. The courts, at an early date, held them invalid. 

As early as 1602, Francis Bacon, in the House of Commons, supported the princil e that a monopoly should be granted only for a 'new manufacture.' In 1623, there was enacted the Statute of Monopolies (21 Jac. I, c. 3, § 1; 1 Walker on Patents, pp. 18-21 (Deller's Ed.1937) which declared void all monopolies and letters patent 'of or for the sole Buying, Selling, Making, Working or Using of any Thing within this Realm, * * *.' However, § VI of this Act made an express exception in favor of patents for inventions.  That Section has become the foundation of the patent law securing exclusive rights to inventors not only in Great Britain but throughout the world.

The result, historically and in principle, has not been a conflict between two legislative mandates. It has been rather a long standing approval, both by the British Parliament and the Congress of the United States, of the unique value of the exercise, for limited periods, of exclusive rights by inventors to their respective inventions, paralleled by an equally sustained and emphatic disapproval of certain other restraints of trade not representative of exclusive rights of inventors to their inventions.

The long and unfaltering development of our patent law often has been touched upon in our decisions. However, in the face of the direct attack now made upon some of its underlying principles, the infinite importance of our inventions justifies a brief review hereof the development and nature of the patent rights attacked. The decision in this case must turn upon this Court's understanding of the relation between the licenses before it, the patent rights to which they relate and the Sherman Act. As interpreter of the Congressional Acts that have expressed the patent policy of this nation since its beginning, this Court is entrusted with the protection of that policy against intrusions upon it. The crucial importance of the development of inventions and discoveries is not limited to this nation. As the population of the world has increased, its geographical frontiers have shrunk. However, the frontiers of science have expanded until civilization now depends largely upon discoveries on those frontiers to meet the infinite needs of the future. The United States, thus far, has taken a leading part in making those discoveries and in putting them to use.

The Constitution of the United States provides that 'The Congress shall have Power * * * To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries; * * *.' (Italics supplied.) Art. I, § 8.

The statutes primarily implementing this provision state:

'Any person who has invented or discovered any new and useful art, machine, manufacture, or composition of matter, or any new and useful improvements thereof, * * * not known or used by others in this country, before his invention or discovery thereof, and not patented or described in any printed publication in this or any foreign country, before his invention or discovery thereof, or more than one year prior to his application, and not in public use or on sale in this country for more than one year prior to his application, unless the same is proved to have been abandoned, may, upon payment of the fees required by law, and other due proceeding had, obtain a patent therefor.' R.S. § 4886, as amended, 46 Stat. 376, 53 Stat. 1212, 35 U.S.C. § 31, 35 U.S.C.A. § 31.

'Every patent shall contain a short title or description of the invention or discovery, correctly indicating its nature and design, and a grant to the patentee, his heirs or assigns, for the term of seventeen years, of the exclusive right to make, use, and vend the invention or discovery * * * throughout the United States and the Territories thereof, referring to the specification for the particulars thereof. * * *' (Italics supplied.) R.S. § 4884, as amended, 46 Stat. 376, 35 U.S.C. § 40, 35 U.S.C.A. § 40. 

'Every application for patent or patent or any interest therein shall be assignable in law by an instrument in writing, and the applicant or patentee or his assigns or legal representatives may in like manner grant and convey an exclusive right under his application for patent or patent to the whole or any specified part of the United States. * * *' (Italics supplied.) R.S. § 4898, as amended, 55 Stat. 634, 35 U.S.C. § 47 (Supp. V, 1946), 35 U.S.C.A. § 47.

Conway P. Coe, Commissioner of Patents of the United States from 1933 to 1945, discussed the historical significance of the early establishment of the American patent system in his testimony before the Temporary National Economic Committee in 1939. He said:

'The American patent system was established at a time when mechanical inventions had already begun to affect not only the industrial conditions, but also the economic, social, and political status of Europe and the new Nation just erected on this continent. The significance f  the inventions put to work in England and the States of the Confederation was realized by the American statemen of that era. It is agreed that their recognition of the value of these new economic factors prompted them to write into the Constitution the provision of article I, section 8, empowering Congress 'to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.' This provision, by the way, is impressive not only because it is included in the Constitution as one of the major grants of power to Congress, but equally because it bestows on patentees a complete monopoly, and therefore raises a question as to the constitutionality of an attempt to compel the owner of a patent to share with others the title, use, and avail of his property. I do not presume to determine the point; but I must contemplate it as an issue to be met here or hereafter.

'The authors of our patent system, judging by the language of article I, section 8, held the exclusiveness of the rights vested in a patentee as a powerful aid to progress in arts and sciences.'  Hearings before the Temporary National Economic Committee, 76th Cong., 1st Sess. 839-840(1939).

He analyzed the 'patent rights' granted to the inventor and stated his reasons for concluding that the 'monopoly' vested in a patentee is not in conflict with our antitrust laws as follows:

'It occurs to me that a great deal of misapprehension results from the failure to distinguish between the monopoly or privilege vested in a patentee and the sort of monopoly that British sovereigns once conferred. It is only when we appreciate this distinction that we can understand how Jefferson could consistently advocate the monopoly of patents for inventions while condemning the traditional form of monopoly.

'Americans generally detest monopoly in the true sense of the term because it makes possible the ruthless exercise of power. Indeed, the American Revolution was precipitated by popular resentment of the monopoly on tea held by the East India Co. It would, therefore, have been exceedingly strange if, only a few years later, the delegates sent to the Constitutional Convention by Massachusetts and the other Colonies had been willing to sanction an equivalent form of monopoly under the new government they were creating. In the sixteenth and seventeenth centuries a king or queen of England could reward a favorite by granting him a monopoly on salt or some other necessary of life. This beneficiary of royal favor was not, of course, the discoverer of salt. That came ready-made from the hands of the Creator eons before the advent of man. What the darling of his or her majesty received was the power to compel others to use salt solely of his supplying and only on terms of his dictation.

'But a patent i  no such monopoly. It is a reward for the invention or discovery of something new, something before unknown, something added to the sum total of human knowledge, utility, well-being; something which the inventor or discoverer, despising the lure of money or fame, might have withheld from his fellow men. By the monopoly that goes with a patent, then, the Government recompenses and, for a limited time, protects the inventor or discoverer who gives to the world the use and benefit of his invention or discovery. This is a kind and a degree of mutuality that negatives monopoly in the old or the current concept. Monopoly in the latter sense of the term gave to an individual or a group complete dominion of something already existent. A patent awards monopoly to the producer of something original, something superadded to the common store. So it is that two things bearing the same name need not be of the same nature.

'It has been contended that there sometimes occurs a clash between the antitrust laws and the patent statutes. I might suggest that since the first anti-trust legislation in 1890, the patent laws and the anti-trust laws have coexisted without any irreconcilable conflicts between them. They have each of them at least one common objective, namely, the retention by the public of a right once acquired by it. As a matter of fact, patents accomplish more than the retention of the acquired rights. Their influence is creative; they operate to multiply and expand acquisitions by the public.' (Id. at pp. 840, 841.)

A comparable analysis of the nature of the grant to inventors of the exclusive right to their respective inventions or discoveries for a limited time has been made by this Court.

'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. Seymour v. Osborne, 11 Wall. 516, 533, 20 L.Ed. 33. 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. United States v. American Bell Telephone Co., 167 U.S. 224, 239, 17 S.Ct. 809 (810), 42 L.Ed. 144; Paper Bag Patent Case, 210 U.S. 405, 424, 28 S.Ct. 748, (753), 52 L.Ed. 1122; Brooks v. Jenkins, 3 McLean 432, 437, Fed.Cas.No.1,953; Parker v. Haworth, 4 McLean 370, 372, Fed.Cas.No.10,738; Allen v. Hunter, 6 McLean 303, 305, 306, Fed.Cas.No. 225; Attorney General v. Rumford Chemical Works, 2 Bann. & Ard. 298, 302. He may keep his invention secret and reap its fruits indefinitely. In consideration of its disclosure and the consequent benefit to the community, the patent is granted. An exclusive enjoyment is guaranteed him for seventeen years, but, upon the expiration of that period, the knowledge of the invention enures to the people, who are thus enabled without restriction to practice it and profit by its use. Kendall v. Winsor, 21 How. 322, 327, 16 L.Ed. 165; United States v. American Bell Telephone Co., supra, page 239 of 167 U.S., 17 S.Ct. 809 (at page 810, 72 L.Ed. 144). To this end the law requires such disclosure to be made in the application for patent that others skilled in the art may understand the invention and how to put it to use.' United States v. Dubilier Condenser Corporation, 289 U.S. 178, 186, 187,  53 S.Ct. 554, 557, 77 L.Ed. 1114, 85 A.L.R. 1488.

This constitutional and legislative policy toward inventions is specific in contrast with the generality of the language in the Sherman Act of 1890. The constitutional and long standing statutory approval of the exclusive rights of an inventor to make, use and sell products of his invention for a limited time was an ample guaranty that the Sherman Act did not directly or impliedly repeal such approval. The prohibition of unreasonable restraints of trade and the approval of exclusive rights of inventors to their inventions for limited periods of time continued to exist together. This was nothing new. As long as the inventors kept within their statutory exclusive rights, they were not engaging in unreasonable restraints of trade violating the Sherman Act.

There was nothing to indicate an intent that the general language of the Sherman Act was to change the nation's traditional and specifically stated policy towards inventions. That policy had been widely regarded as having made a major contribution to the nation's exceptional economic progress. The Sherman Act unquestionably applied to any abuse of a patentee's exclusive rights which exceeded the limit of those rights and which amounted to an unreasonable restraint of interstate trade. Hooever, there was nothing to indicate that the Sherman Act restricted the traditional patent rights. Bement v. National Harrow Co., supra, 186 U.S. at page 92, 22 S.Ct. at page 755, 46 L.Ed. 1058.

LIMITED LICENSE AGREEMENTS.

The primary issue in this case, therefore, is to determine whether or not Line by the issuance of its restricted licenses has thereby sought to exercise any right that is in excess of the exclusive right secured to Line by the patent laws of the United States. If it has done so, then such licenses, like other agreements, must be scrutinized to determine whether or not they create an unreasonable restraint of trade in violation of the Sherman Act.

The first consideration is the relation of the Sherman Act to provisions in a license agreement which place limitations-as in the Bement and General Electric cases-upon the prices which may be charged by the licensee for products made and sold by it under the protection of its license. The issue corresponds to that raised by the Westinghouse license in the General Electric case.  The Sherman Act's invalidation of agreements in restraint of trade applies only to those in unreasonable restraint of trade and the definition of such unreasonableness depends largely upon the common law meaning of restraint of trade.  This permits such invalidation where,f or example, a license is a mere subterfuge for price fixing which otherwise would amount to unreasonable restraint of trade in violation of the Sherman Act. See United States v. U.S. Gypsum Co., decided concurrently with this case. 

The Sherman Act's prohibition of unreasonable restraints of trade, accordingly, would not invalidate an unconditional, nonexclusive license agreement which served only to release the licensee from the right of the patent holder to exclude him from making, using or selling a patented article. The original, exclusive right of the patent holder, being secured to him through the terms of his patent, was not in violation of the Sherman Act. Accordingly, his release or waiver of a part of that exclusive right by issuance of an unconditional, non-exclusive license, per se, decreased rather that increased the statutory restraint of trade to which he was entitled.

The next question is whether the insertion in such a license of some limitation upon the licensee's right to sell the articles made by the licensee under the patent, per se, converts this otherwise lawful agreement into an unreasonable restraint of trade violative of the Sherman Act. The answer is no. Just as an unlimited license is a partial, but lawful, relaxation of the lawful restraint of trade imposed by the patent so a limited license is but a correspondingly less relaxation of that same restraint.

The fact that the limitation in the license is a limitation on the price which may be charged by the licensee in making sales of the article made by the licensee under the protection of the patent does not change the answer, provided the price prescribed is 'normally and reasonably adapted to secure pecuniary reward for the patentees  monopoly.'  Here again, the restraint of trade imposed by the patent itself is lawful. Therefore, as long as the license agreement has only the effect of reducing the lawful restraint imposed by the patent, such agreement merely converts the original lawful restraint into a lesser restraint, equally lawful.

Such argeements should be carefully scrutinized to make sure that they do not introduce new restrictions which, as judicially construed, unreasonably restrain trade and thus violate the Sherman Act. In the instant case the findings eliminate such possibilities and thus reduce the issue here to one comparable with the issue in the Bement and General Electric cases.

This brings us to a further discussion of the nature of the license in the present case and of the precise limitations contained in it. This requires, first of all, a consideration of the nature of the exclusive right to make, use and sell the patented product. The precise nature of such a 'patent right' has been described as follows by Chief Justice Taft in a unanimous opinion of this Court:

'It is the fact that the patentee has invented or discovered something useful and thus has the common-law right to make, use and vend it himself which induces the government to clothe him with power to exclude everyone else from making, using or vending it. In other words, the patent confers on such common-law right the incident of exclusive enjoyment and it is the common-law right with this incident which a patentee or an assignee must have (in order to bring a suit for infringement). That is the implication of the descriptive words of the grant 'the exclusive right to make, use and vend the invention.' The government is not granting the common-law right to make, use and vend, but it is granting the incident of exclusive ownership of that common-law right, which can not be enjoyed save with the common-law right. A patent confers a monopoly. So this court has decided in the Paper Bag Case, supra (210 U.S. 405, 28 S.Ct. 748, 52 L.Ed. 1122) and in many other cases. The idea of monopoly held by one in making, using and vending connotes the right in him to do that thing from which he excludes others.' Crown Co. v. Nye Tool Works, 261 U.S. 24, 36, 37, 43 S.Ct. 254, 256, 257, 67 L.Ed. 516.

This analysis is the key to the issue before us. It demonstrates that the common law right to make, use and sell the product of an unpatented invention exists without any right to exclude others from so making, using or selling such product. The additional 'exclusive right,' or so-called 'patent right,' which is added to the common law right of the inventor is added by authority of the Constitution and of the federal statutes, so as to promote the progress of science, the useful arts and, no doubt, the general welfare. The patent or any interest therein may be assigned. R.S. § 4898, as amended, 55 Stat. 634, 35 U.S.C. § 47 (Supp. V, 1946), 35 U.S.C.A. § 47.  An assignee, exercising his right to exclude others during the life of the patent from making, using or selling articles under protection of the patent, does not practice a restraint of trade in violation of the Sherman Act any more than would his assignor if the assignment had not been made.

Any attempted assignment or transfer short of those indicated in the statute 'is a mere license, giving the licensee no title in the patent, and no right to sue at law in his own name for an infringement.'  The legal position of the holder of a simple, unconditional, nonexclusive license is important.  Before his receipt of his license, he had the common law right to make, use and sell the patented article as well as other articles, except to the important extent prevented by the patentee's exclusive rights. The license changed that position by withdrawing from the licensee, to the extent of the license, the restriction which the patent placed upon him. Accordingly, to the extent of his license, the restraint placed upon trade by the patent was diminished. In relation to the Sherman Act his license, instead of creating an added ground for asserting a violation of the Sherman Act, thus, per se, relaxed an existing restraint of trade. The previous restraint imposed by the patent was not a violation of the Sherman Act and, therefore, the mere lessening of that restraint was not a violation of that Act. The important point is the need to see to it that the lessening of the restaint resulting from the issuance of either an absolute license or a limited license is, in fact, no more than a mere withdrawal of the lawful restraint imposed by the patent and is not either directly or indirectly an imposition of a new restraint not within the ambit of the patent right. An unconditional, nonexclusive and royalty-free license presents, per se, no need for special scrutiny under the Sherman Act. A royalty-yielding license presents the issue suggested by the language in the General Electric case. In order not to violate the Sherman Act, the royalty must be 'normally and reasonably adapted to secure pecuniary reward for the patentee's monopoly.'  However, as well explained in that case, a royalty may not, by itself, satisfy the needs of the patent holder. Limitations on the price of sales by the licensee of products made by the license under the patent may be the best, or even the only, condition that is thus 'normally and reasonably adapted' to the situation.

The following statements illustrate the directness with which this Court repeatedly has decided in favor of the validity of limited licenses when that question has been before it:

'* * * the general rule is absolute freedom in the use or sale of rights under the patent laws of the United States. The very object of these laws is monopoly, and the rule is, with few exceptions, that any conditions which are not in their very nature illegal with regard to this kind of property, imposed by the patentee and agreed to by the licensee for the right to manufacture or use or sell the article, will be upheld by the courts. The fact that the conditions in the contracts keep up the monopoly or fix prices does not render them illegal.' Bement v. National Harrow Co., supra, 186 U.S. at page 91, 22 S.Ct. at page 755, 46 L.Ed. 1058.

'As was said in Unite  States v. General Electric Co., 272 U.S. 476, 489, 47 S.Ct. 192, 196, 71 L.Ed. 362, the patentee may grant a license 'upon any condition the performance of which is reasonably within the reward which the patentee by the grant of the patent is entitled to secure.' The restriction here imposed (upon the licensee to manufacture and to sell the patented article for certain uses only) is of that character. The practice of granting licenses for a restricted use is an old one, see Providence Rubber Company v. Goodyear, 9 Wall. 788, 799, 800, 19 L.Ed. 566; Gamewell Fire-Alarm Telegraph Co. v. Brooklyn, C.C., 14 F. 255. So far as appears, its legality has never been questioned.' General Talking Pictures Corporation v. Western Electric Co., 305 U.S. 124, 127, 59 S.Ct. 116, 117, 83 L.Ed. 81.

The normality, reasonableness and practical necessity for inserting a price-limiting condition in certain licenses, without trespassing upon the prohibited area of unlawful restraints of trade, is effectively summarized in the General Electric case, 272 U.S. at page 490, 47 S.Ct. at page 197, 71 L.Ed. 362:

'If the patentee goes further and licenses the selling of the articles, may he limit the selling by limiting the method of sale and the price? We think he may do so provided the conditions of sale are normally and reasonably adapted to secure pecuniary reward for the patentee's monopoly. One of the valuable elements of the exclusive right of a patentee is to acquire profit by the price at which the article is sold. The higher the price, the greater the profit, unless it is prohibitory. When the patentee licenses another to make and vend and retains the right to continue to make and vend on his own account, the price at which his licensee will sell will necessarily affect the price at which he can sell his own patented goods. It would seem entirely reasonable that he should say to the licensee, 'Yes, you may make and sell articles under my patent but not so as to destroy the profit that I wish to obtain by making them and selling them myself.' He does not thereby sell outright to the licensee the articles the latter may make and sell or vest absolute ownership in them. He restricts the property and interest the licensee has in the goods he makes and proposes to sell.' 

During the hearings of the Temporary National Economic Committee, testimony was received from the Commissioner of Patents and manufacturers familiar with the commercial development of patented products bearing on the reasonableness and propriety of price limitations in patent licenses comparable to those in the present case. It was to the effect that commercially successful mechanical inventions, such as those in the electrical, communications and automotive industries, usually represent not only the intrinsic merit of the inventions themselves but a substantial investment in research, experimentation and promotion. If, after the disclosure of the invention, others are to be licensed to make the patented article, the costs of production by such licensees will reflect none of the investments above-mentioned. If the patentee is to be reimbursed for his expenditures, he will need, therefore, to secure the benefit of a royalty sufficient to accomplish this or of a restriction on the price at which licensees may sell their products under the patent. This price would have to be one that would enable the patentee to manufacture and sell the article in such quantities and at such prices as would produce a return to him commensurate with his investment in it. He might prescribe both a royalty and a restriction. As long as the royalties and the prices were 'normally and reasonably adapted to secure pecuniary reward for the patentee's monopoly.'  They would perform much the same function. 

In cases where patents are owned by comparatively small industrial producers but licenses are to be issued by them to comparatively large industrial producers in the same field, the necessity for early reimbursement of the patent owners for their development costs is clear and the danger that a large licensee will undersell his smaller licensor is obvious. This is the situation in the present case. The General Electric Company and the Westinghouse Electric Corporation are among the licensees of the much smaller patent holders, Line and Southern. Similarly, where outside capital is needed to finance the development of an invention, iti § normal and reasonable for the investors to require not only a valid patent but also to insist that any licenses issued during the initial operating period shall contain such price limitations as will allow the patent holder to amortize his original investment within a reasonable time. In this case, finding of fact No. 32 shows that 'the price limitation provisions contained in the various license agreements here in evidence were insisted upon by the patent owner and were intended and reasonably adapted to protect its own business and secure pecuniary reward for the patentee's monopoly.' 

The following statement by Conway P. Coe, Commissioner of Patents, before the Temporary National Economic Committee in 1939, reinforces the above conclusions:

'Speculative capital must be encouraged to fall in behind a new enterprise and this is true whether the enterprise is wholly new or represents merely an expansion of an established organization. Some testimony has been offered to this committee by representatives of large corporations that they would continue to invent, and invent, and invent, and research, research, and research whether or not they were rewarded by the patent grant, but, if you will investigate, I believe you will find that whenever these large corporations, themselves firmly established, undertake a new development, that development is likely to be founded upon patent protection. Whatever opinions have been expressed to this committee or may hereafter be expressed as to whether or not the inventor will continue to invent without the patent system, I think I can present to you indisputable evidence that speculative capital will not back new inventions without the patent protection. And in the final analysis this is the crux and the most important thing in the whole patent question.'  Hearings before the Temporary National Economic Committee, supra, at pp. 857, 858.

The foregoing supports the conclusions reached in the Bement and General Electric cases, supra. The basis for such support is sufficiently broad to lead to the same result in the present case.

SUBLICENSES AND CROSS-LICENSES.

Under the foregoing principles and authorities, a simple price-limiting patent license, in which the price limitations meet the test stated in the General Electric case, is a lawful agreement. Such a license would involve, as a possible restraint of trade, only the exclusive right to make, use and sell the patented product. That restraint would exist by virtue of the statute and constitutional provision long antedating the Sherman Act. If the limitations in a license reach beyond the scope of the statutory patent rights, then they must be tested by the terms of the Sherman Act. Assuming that in the instant case the price limitations do not reach beyond the restraint of the patent, the next question is: Does the additional sublicense issued by Line under the Southern patent make a difference? The answer is no.

The sublicense, per se, further diminishes the statutory restraint of trade imposed by the patent law. It adds a release r om the restraint of Southern's patent. Line's authority to issue the sublicense was an express grant by Southern to Line of an exclusive right to issue it. Per se, this sublicense certainly amounts to no more than another license under another patent. In the instant case it is under a complementary patent without which Line's license would be without commercial value. For that very reason it is a reasonable and necessary part of the transaction. In both the Bement and General Electric cases, the license in question was issued not merely under one, but under many patents held by the licensor. In those cases, apparently, it was not thought necessary to question the relation of those patents to one another or the authority of the licensor to issue the license under each of them. In any event, there hardly could have existed in those cases any closer relationship between the patents involved or a more essential and normal reason, of a patent nature, for combining rights under them than existed here between Line's and Southern's complementary patents. Except for the cross-licensing feature, to be next considered, the situation in relation to the Sherman Act is the same here as though Line had received an assignment of Southern's patent and issued licenses under it as well as under Line's patent.

In the present case, there are ten licensee-defendants instead of one as in each of the Bement and General Electric cases. In view of the positive finding that there was no agreement or understanding among the licensees amounting to an unreasonable restraint of trade, this mere multiplication of one license by ten produces a repetition of the same issue rather than a different issue. It is apparent also from the record in the General Electric case that, in that case, in addition to the Westinghouse license, there were licenses to 13 other manufacturers, which had been issued by the licensor, although the licensees under them were not made parties to the suit. 15 F.2d 715, 716.

It is suggested also that the Bement and General Electric rule does not apply because there is a cross-licensing agreement between Line and Southern. The suggestion apparently is that such an agreement, per se, reaches beyond the scope of the exclusive rights of the parties under the patents and converts the price limitations in the respective licenses into unreasonable restraints of trade violating the Sherman Act.

The cross-license from Southern carries no price-limiting feature. At most it is a royalty-free cross-license issued to Line in consideration of Line's license to Southern. It is accompanied by a grant from Southern to Line of an exclusive license to grant sublicenses under Southern's patent. Provision is made also for the equal division between Southern and Line of such royalties as shall be received by Line upon products made and sold by the respective licensees under the Southern and Line patents.

These sublicenses and the royalties derived from them do not, however, increase the restraints on trade beyond those restraints which are inherent in the respective patents. In fact, each original license decreased those restraints under Line's patent and each sublicense did the same under Southern's patent. Because of the complementary relationship between the patents, these sublicenses have served substantially to remove the restraints which the respective patents, when held separately, put in the way of production. The two patents together completely covered the product. If the price limitations were valid under Line's licenses, the issuance by Line of the sublicenses under Southern's patent has no more effect on the question involved in this case than if Southern, instead of granting to Line an exclusive right to issue sublicenses under Southern's patent, had assigned that patent to Line and Line had then issued original licenses under it on the same terms as Line issued the sublicenses.

The next consideration is the effect of the cross-license by Southern to Line,c oupled with the grant of the exclusive right to issue the above-mentioned sublicenses under Southern's patent and the division of certain royalties received by Line. Where, as here, there is no agreement, course of dealing or other circumstance than the existence of the cross-licenses between complementary patent holders, the cross-licensing agreements do not, per se, reach beyond the scope of the patent rights.

Patent pools, especially those including unrelated or distantly related patents and involving the issuance of many forms of royalty-free, royalty-bearing or price-limiting licenses and cross-licenses, might present a different picture from that in this case. Such arrangements might be but a screen for, or incident to, an unlawful agreement in restraint of trade violating the Sherman Act. Here we have no such facts. The findings eliminate all bases for the claim of invalidity except the terms of the license agreements, per se. We are not here confronted with the effect of cross-licenses between unrelated patents, Here we have only that natural situation, common under our patent laws, where two or more complementary patents are separately owned. One is for an improvement that is commercially essential to the other. In such a case one solution is to combine the ownership of the two by purchase and complete assignment. That, per se, would not involve an unlawful restraint of trade.

The solution in the instant case was even more natural than a consolidation of the patents by purchase. It conduced even more to the maintenance of competition. Each patentee granted to the other a nonexclusive, royalty-free license. This cross-licensing amounted to a waiver by each patent holder of his right to exclude the other from making, using or selling the patented product. This resulted in a diminution of the restraint created by the patent statute. This, per se, was, therefore, well within the scope of the patent and not a violation of the Sherman Act. Both patentees became producers.

Unless the terms of the cross-licenses reach beyond those that are normally and reasonably adapted to the patent relationships of the parties, the cross-licenses are no more outside of the protection of the patent law than would be direct licenses. A reasonable price-limiting provision in at least one of two cross-licenses is just as normal and reasonable a patent provision as it would be in a direct license. In the present case the validity of the price limitation in Line's license to Southern is entitled to the same judicial support and for the same reasons as if no cross-license had been issued in exchange.

In the present case, the need for price-limiting provisions, both in the license to Southern and in the licenses to the other ten defendants, rest upon the need of the patent holder to protect its opportunity to continue the manufacture of its own patented product. The substance of the situation is that the patent holder needs to protect itself precisely as much and in the same way as in the case of a direct license standing alone. The Sherman Act traditionally tests its violation not by the form but by the substance of the transaction.

In distinction from patent pools and from cross-license between holders of competing or even noncompeting but unrelated patents, we have here a case of a cross-license and a division of royalties between holders of patents which are complementary and vitally dependent upon each other. We have here complementary patents each of which alone is commercially of little value, but both of which, together, spell commercial success for the product. Cross-licenses between their holders, on terms within the needs of their patent monopolies, are essential to the realization of the benefits contemplated by the patent statutes. Far from being unlawful agreements violative of the Sherman Act, such agreements provide in fact the only reasonable means for releasing to the public the benefits intended for the public by te  patent laws. A cross-license between mutually deadlocked complementary patents is, per se, a desirable procedure. Standard Oil Co. v. United States, 283 U.S. 163, 170 et seq., 51 S.Ct. 421, 423, 75 L.Ed. 926. Its validity must depend upon the terms and substance of the surrounding circumstances.

The record in the General Electric case discloses that the license agreement between the General Electric Company and Westinghouse which was there upheld was itself a cross-licensing agreement.  In fact, the opinion of the lower court in the instant case commented on that cross-license as follows:

'A cross-license agreement existed between General Electric and Westinghouse which contained agreements even more restrictive than the price protection provisions of the cross-licenses involved in the case at bar.' United States v. Line Material Co., D.C., 64 F.Supp. 970, 975.

The opinion in the General Electric case makes no distinction between cross-licenses and direct licenses. That case, therefore, is itself a precedent for upholding a cross-licensing agreement under facts characterized below as being 'even more restrictive' than those here presented.

The acquisition by a single party of patents on noncompeting machines has been held not to be, per se, a violation of the Sherman Act. In United States v. Winslow, 227 U.S. 202, 217, 33 S.Ct. 253, 255, 57 L.Ed. 481, Mr. Justice Holmes, in a unanimous opinion of the Court, said:

'The machines are patented, making them is a monopoly in any case, the exclusion of competitors from the use of them is of the very essence of the right conferred by the patents, Paper Bag Patent Case (Continental Paper Bag Co. v. Eastern Paper Bag Co.) 210 U.S. 405, 429, 28 S.Ct. 748 (755), 52 L.Ed. 1122, 1132, and it may be assumed that the success of the several groups was due to their patents having been the best. As, * * * they did not compete with one another, it is hard to see why the collective business should be any worse than its component parts. * * * we can see no greater objection to one corporation manufacturing 70 per cent of three noncompeting groups of patented machines collectively used for making a single product than to three corporations making the same proportion of one group each. The disintegration aimed at by the statute does not extend to reducing all manufacture to isolated units of the lowest degree.' See, also United States v. United Shoe Machinery Co., 247 U.S. 32, 45, 51 et seq., 38 S.Ct. 473, 478, 480, 62 L.Ed. 968; United Shoe Machinery Corporation v. United States, 258 U.S. 451, 463, 464, 42 S.Ct. 363, 367, 66 L.Ed. 708.

In Standard Oil Co. v. United States, 283 U.S. 163, 170, 171, 175, 51 S.Ct. 421, 423, 424, 425, 75 L.Ed. 926, Mr. Justice Brandeis spoke as follows for a unanimous Court (except for Mr. Jut ice Stone who took no part in the case):

'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 legally 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 U.S.C.A. § 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. * * * 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.  * * *

'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.'

In the above context, and for the reasons previously presented, it is evident that the agreements effecting a price fixation which thus may violate the Sherman Act are only those which 'impose * * * an unreasonable restraint upon interstate commerce,' within the meaning of the Sherman Act read in the light of the patent laws.  The agreements which remain within the ambits of the patents to which they relate still are lawful agreements by virtue of the patent laws, just as they have been throughout the life of our patent system.

JUDICIAL AND LEGISLATIVE HISTORY SINCE THE GENERAL ELECTRIC CASE.

Neither the Bement nor the General Electric cases, supra, has been overruled and the reasoning upon which they are based has not been directly or indirectly rejected by this Court. On the other hand, this Court repeatedly has recognized the existence of the principles announced in them. See, for example, Carbice Corporation v. American Patents Development Corporation, 283 U.S. 27, 31, 51 S.Ct. 334, 335, 75 L.Ed. 819; General Talking Pictures Corporation v. Western Electric Co., 305 U.S. 124, 127, 59 S.Ct. 116, 117, 83 L.Ed. 81:

'Appellants argue that the distributors were free to license the films for exhibition subject to the restrictions, just as a patentee in a license to manufacture and sell the patented article may fix the price at which the licensee may sell it.' (Citing the Bement and General Electric cases.) Interstate Circuit, Inc. v. United States, 306 U.S. 208, 228, 59 S.Ct. 467, 475, 83 L.Ed. 610.

And see United States v. Univis Lens Co., 316 U.S. 241, 252, 62 S.Ct. 1088, 1094, 86 L.Ed. 1408; United States v. Masonite Corporation, 316 U.S. 265, 277, 62 S.Ct. 1070, 1077, 86 L.Ed. 1461.

The rule of stare decisis applies to the interpe tation given to the patent statutes and to the Sherman Act by the Bement and General Electric cases. There is no occasion here for such a relaxation of that rule as was suggested by Mr. Justice Brandeis in cases interpreting broad constitutional phrases. See his dissent in Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 410, 52 S.Ct. 443, 448, 76 L.Ed. 815. To the extent that the present holdings are based upon opinions of this Court, that element is inherent in the rule of stare decisis.

The exceptional recent activity in seeking, by statutory amendment, a change in the patent laws as interpreted in the Bement and General Electric cases indicates a widespread understanding that, if such interpretation is to be changed, the remedy calls for congressional action. The resistance to such a change which has been shown by Congress is impressive.  It indicates no dissatisfaction with the interpretation of existing law as expressed in the Bement and General Electric cases.

There appears, therefore, to be neither adequate reason nor authority for overruling the Bement and General Electric cases or for distinguishing this case fromt hem. 

Notes

As early as 1912, H.R. 22345, 62d Cong., 2d Sess., proposed that a patentee be not permitted to fix the price of articles to be sold by others under his patent.

During the hearings held by the Temporary National Economic Committee, the Department of Justice recommended many fundamental as well as minor changes in the patent law. These included the prohibition of price-limiting patent licenses comparable to those here at issue. Preliminary Report, Temporary National Economic Committee, Sen. Doc. No. 95, 76th Cong., 1st Sess., 16, 17 (1939). The Department of Commerce took an opposite position. It submitted recommendations for retaining but improving the patent system substantially in accordance with its traditional underlying policies. The Final Report of the Temporary National Economic Committee incorporated the substance of the proposals of the Department of Justice. It included a recommendation that patentees be not permitted to limit the price at which a licensee might sell a product made under the license. Final Report, Temporary National Economic Committee, Sen. Doc. No. 35, 77th Cong., 1st Sess. 36, 37 (1941).

In 1941, the President appointed the National Patent Planning Commission to submit recommendations on questions dealt with in the report. (See note 12, supra.) In 1943, among the examples of the proposed reforms which it concluded 'would not be a beneficial innovation in our patent system,' it listed 'outlawing certain limitations in patent licenses, * * *.' This evidently referred to the above-mentioned proposals of the Temporary National Economic Committee to outlaw price restrictions and other limitations in patent licenses. Report of the National Patent Planning Commission, House Doc. 239, 78th Cong., 1st Sess. 9 (1943).

Bills to the same general effect as the proposals of the Temporary National Economic Committee have been introduced and referred to Committees of Congress but have advanced no further. Among them have been the following:

S. 2491 (§ 4), S. 2730 (§ 3), H.R. 7713 (§ 3), 77th Cong., 2d Sess. (1942); H.R. 109 (§ 3), H.R. 1371 (§ 29), H.R. 3874 (§ 29), 78th Cong., 1st Sess. (1943); H.R. 97 (§ 29), H.R. 3462 (§ 29), 79th Cong., 1st Sess. (1945); S. 2482, 79th Cong., 2d Sess. (1946); S. 72, 80th Cong., 1st Sess. (1947). Section 3 of S. 2730, supra, proposed that 'Every sale, assignment, or conveyance of a patent and every grant of a license thereunder, in connection with any condition, agreement, or understanding which restricts the price at which the purchaser, assignee, grantee, or license (licensee) may sell any article producible under the patent and customarily marketed in interstate commerce, is hereby declared to be illegal.'