Quick Point Pencil Company, a Missouri Corporation v. Jane Aronson (Formerly Known as Jane Leopoldi) , 567 F.2d 757 ( 1978 )

ROSS, Circuit Judge.

Quick Point Pencil Company, a Missouri corporation, brought this action for declaratory judgment, naming Jane Aronson, an Illinois resident, as defendant. The amount in controversy exceeded the statutory $10,-000 and the district court had jurisdiction pursuant to 28 U.S.C. § 1332.¹ As the basis for the action, Quick Point alleged a contract between the parties negotiated in June and July of 1956, wherein Aronson granted Quick Point an exclusive license to manufacture and sell a keyholder for which Aronson (formerly Jane Leopoldi) had submitted a patent application, Serial No. 542,-677, on October 25, 1955. In exchange for the exclusive license Quick Point promised to pay Aronson a five percent royalty, to be reduced to two and one-half percent if no patent were granted within five years. Quick Point agreed to pay these royalties for as long as it continued to manufacture and sell the keyholders. Aronson never obtained a patent on the keyholder but Quick Point paid royalties under the agreement until October of 1975,² for a total of $203,963.84.

In its complaint Quick Point alleged that the license agreement, providing for royalties on an unpatented and unpatentable article for an indefinite duration, conflicted with article I, section 8, clause 8 of the United States Constitution,³ and the Supremacy Clause.⁴ It sought declarations that the agreement was unenforceable and that it had no further liability to make royalty payments under the license. After the parties filed a joint stipulation of uncontested facts and cross-motions for summary judgment, the district court took the case under submission without trial.

On December 29, 1976, the district court ordered, adjudged and decreed that the contract is valid and enforceable and Quick Point has the continuing liability to make royalty payments for as long as it manufactures the keyholders. He concluded that “[t]he language of the agreement is plain, clear and unequivocal and has no relation as to whether or not a patent is ever granted or is not granted.” Quick Point Pencil Co. v. Aronson, No. 75-1056C(l), 425 F.Supp. 600 (E.D.Mo., filed Dec. 29, 1976). He determined that this case is not controlled by Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. 234, 84 S.Ct. 779, 11 L.Ed.2d 669 (1964); Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 84 S.Ct. 784, 11 L.Ed.2d 661 (1964); nor Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969). Quick Point appeals from that judgment.

Quick Point contends that the district court erred in holding that this case is governed solely by contract law without regard for federal patent and antitrust considerations. It argues that the principles set forth in Lear, Inc. v. Adkins, supra, should be controlling here. Aronson contends that the contract contains an unequivocal prom-' ise to pay a royalty which is independent of the existence of a patent and enforceable as long as Quick Point continues to manufacture the keyholder.

The issue we must decide is whether Quick Point, a patent application licensee, is bound by the contractual provision requiring it to pay royalties for as long as it manufactures the item described in the patent application even though the licensor abandoned the application many years ago and the licensee’s competitors are freely manufacturing the unpatented item.⁵ We believe it is not so bound and reverse the district court’s judgment.

The issue involves the relationship between state contract law and federal patent law. Although the Supreme Court has not decided the precise question, it has dealt with the conflict in similar contexts and has established principles that can be applied here.

We begin with the principle that federal law requires that all ideas in general circulation be dedicated to the common good unless they are protected by a valid patent. See Lear, Inc. v. Adkins, supra, 395 U.S. at 656, 89 S.Ct. 1902; Sears, Roebuck & Co. v. Stiffel Co., supra, 376 U.S. at 232-33, 84 S.Ct. 784; Compco Corp. v. Day-Brite Lighting, Inc., supra, 376 U.S. at 238, 84 S.Ct. 779. In Sears the Court made the following statement concerning the relationship between state laws on unfair competition and the federal patent laws:

To allow a State by use of its law of unfair competition to prevent the copying of an article which represents, too slight an advance to be patented would be to permit the State to block off from the public something which federal law has said belongs to the public. The result would be that while federal law grants only 14 or 17 years’ protection to genuine inventions, see 35 U.S.C. §§ 154, 173, States could allow perpetual protection to articles too lacking in novelty to merit any patent at all under federal constitutional standards.

376 U.S. at 231-32, 84 S.Ct. at 789.

We believe this principle applies to a state’s contract law as well as to state unfair competition laws, at least when a patent application is involved. Further support for this belief is found in Lear, Inc. v. Adkins, supra, 395 U.S. at 677, 89 S.Ct. at 1914 (Black, J., joined by Warren, C. J., and Douglas, J., concurring in part and dissenting in part):

The national policy expressed in the patent laws, favoring free competition and narrowly limiting monopoly, cannot be frustrated by private agreements among individuals, with or without the approval of the State.

In Lear a patent licensee attempted to defend a suit for royalties by challenging the validity of the underlying patent. The situation was similar to the one involved here. While the patent application was pending the inventor and the manufacturer contracted for an exclusive license-royalty arrangement. Before the patent was allowed the manufacturer discontinued the royalty payments because it believed that the improvements were not sufficiently novel and that the inventor would never be able to obtain a patent.⁶ The patent office did grant a patent and the inventor sued for royalties. The Supreme Court of California refused to allow the manufacturer’s patent invalidity defense holding that it was estopped by the contract to make that challenge. Finding that such a rule would significantly frustrate overriding federal policies, the United States Supreme Court reversed.

Under the rule announced in Lear, if Aronson had obtained a patent which was later determined to be invalid, Quick Point’s liability would have terminated.⁷ In fact Quick Point could have challenged the validity of the patent and suspended payment of royalties while making the challenge. See Lear, Inc. v. Adkins, supra, 395 U.S. at 674, 89 S.Ct. 1902.

Although Aronson’s position is different than the inventor’s in Lear because no patent was granted here, we believe, as the Supreme Court did, that “enforcing this contractual provision would undermine the strong federal policy favoring the full and free use of ideas in the public domain.” Id. at 674, 89 S.Ct. at 1913.

Two other Supreme Court decisions lend support to our conclusion. In Brulotte v. Thys Co., 379 U.S. 29, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964), the Court held: “[A] patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.” Id. at 32, 85 S.Ct. at 179. So if Aronson had obtained the patent for which she applied, after 17 years the contract with Quick Point would have been invalid and Quick Point’s liability for royalties terminated.

In Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974), the Supreme Court faced another situation involving a conflict between state trade secret law and federal patent policies. In holding that state trade secret laws may protect unpatented but clearly patentable inventions without conflicting with the patent law policy of disclosure, the Supreme Court stated:

The possibility that an inventor who believes his invention meets the standards of patentability will sit back, rely on trade secret law, and after one year of use forfeit any right to patent protection, 35 U.S.C. § 102(b), is remote indeed.

Id. at 490, 94 S.Ct. at 1890.

Not only did Aronson not rely on trade secret protection, it is doubtful that her key holder, would have been entitled to any such protection. The Court stated:

A trade secret law, however, does not offer protection against discovery by fair and honest means, such as by independent invention, accidental disclosure, or by so-called reverse engineering, that is by starting with the known product and working backward to divine the process which aided in its development or manufacture.

Id. at 476, 94 S.Ct. at 1883 (footnote omitted).

Any member of the general public could have inspected Aronson’s keyholder in an attempt to determine how to manufacture it.⁸ See Sears, Roebuck & Co. v. Stiffel Co., supra, 376 U.S. at 231-32, 84 S.Ct. 784. Aronson did not take this chance. She applied for a patent, contracted with regard to that patent application,⁹ and cannot now argue that patent law principles are irrelevant to this case.¹⁰

Aronson believed her invention was patentable and she submitted a patent application. Had a patent issued she would have had 17 years of exclusive rights to her invention before it became part of the public domain. She approached Quick Point with her idea and the parties entered into a contract anticipating that a patent would issue. If that had happened, under Brulotte v. Thys Co., supra, 379 U.S. at 32, 85 S.Ct. 176, Quick Point’s liability for royalties would have ended after 17 years in spite of the contract. Furthermore, if a patent had issued and Quick Point had later questioned the patentability of the keyholder, under Lear, Inc. v. Adkins, supra, 395 U.S. at 674, 89 S.Ct. 1902, it could have stopped making royalty payments and challenged the patent in court. If such a challenge were successful, Quick Point’s liability for payments would have ended in spite of the contract.¹¹ We do not believe the result should be different here. The principles discussed above strongly indicate that any other conclusion would violate public policy.

We conclude that Quick Point, who contracted for an exclusive license to manufacture and sell an item for which the licensor had submitted a patent application, is not bound by a provision for prolonged royalty payments since the licensor abandoned the application¹² and no patent was ever obtained.¹³

The judgment of the district court is reversed and the case remanded for disposition consistent with this opinion.

2 . Quick Point Pencil Company continues to make and sell the keyholders but is no longer making royalty payments under the agreement.

3 . The United States Constitution provides:

[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;

$ * * ¡j< sfc $

U.S.Const. art. I, § 8, cl. 8.

4 . The Supremacy Clause provides:

This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, and any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.

U.S.Const. art. VI, cl. 2.

5 . The dissent describes the contract as a “trade-secret licensing agreement.” We doubt that the keyholder could ever have been characterized as a trade secret. Although it may have been an “invention,” it was a relatively simple device and once marketed, it was completely disclosed. See Restatement of Torts § 757, comment b. (“Matters which are completely disclosed by the goods one markets cannot be his secret.”)

The dissent agrees that the parties “intended that Aronson would in good faith attempt to patent the keyholder.” The language from Mil-grim’s law review article quoted by the dissent further supports our conclusion that patent principles apply in this case. Milgrim states:

* * * the license reward for a trade secret tends to be a function of consideration for disclosure; for a patent, consideration for use * * *. Since a prospective trade secret licensee knows that his licensor cannot protect him from independent developers, he weighs the value of disclosure against the risks of relying on matter which is subject to third-party royalty-free use. Whether articulated or not, such balancing is the stuff that leads to hard negotiating for royalty rate and duration.

Milgrim, Sears to Lear to Painton: Of Whales and Other Matters, 46 N.Y.U.L.Rev. 17, 30 (1971). Quick Point contracted for “the exclusive right to make and sell keyholders of the type shown in [Aronson’s] application * The agreement was not for disclosure but for the exclusive right to manufacture an invention that was to be patented.

6 . Unlike the contract involved here the parties had agreed that if no patent were issued or if a patent were later declared invalid, the manufacturer had the right to terminate the license.

7 . The precise point at which a licensee’s liability for royalties may terminate under the rule announced in Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1968), is a matter of some dispute. In Lear, the date of the patent’s issuance was the decisive date, but Lear had challenged the patent before it issued. Here Quick Point sought a decree that it had no further liability for royalties, so the date of Quick Point’s challenge becomes the crucial date.

8 . That, in fact, is what has happened here. The parties stipulated, and the district court found, that in the late 1960’s Quick Point’s competitors began making keyholders similar to the one in question and since no patent was ever granted they continue to make these similar keyholders without paying royalties. No state law could prohibit this copying. See Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 231-32, 84 S.Ct. 784, 11 L.Ed.2d 661 (1964).

9 . Jane Aronson contends that the contract provision reducing the royalties if no patent issued within five years indicates that patent law was not considered by the parties nor applicable here. Quick Point suggests that that provision does not indicate that it anticipated that if no patent was issued within five years none would ever issue, but that it provides for the possibility that the patent would issue at a date more than five years after the contract was signed. We need not speculate as to what agreement the parties might have reached had no patent application been involved — one was.

10 . In her brief Aronson argues that the pending patent application was relevant because it contained a disclosure that was maintained in secrecy by the United States Patent Office and thus was not available to the general public. On the other hand she contends that the agreement was independent of the existence of a patent.

11 . Although the parties here did not expressly condition their agreement on the issuance of a patent, under the facts of this case and in view of our decision, we believe the result would be the same as in Lear, Inc. v. Adkins, supra.

12 . It is interesting to note that Aronson abandoned her effort to get a patent in September of 1961, about six months after her husband applied for a patent on a similar device. He received a patent in 1964.

13 . In view of our conclusion we need not reach Quick Point’s contentions that the license was in restraint of trade and violated the federal antitrust laws, or that under Missouri law the license was not enforceable.