United States v. United States Gypsum Co. was a patent–antitrust case in which the United States Supreme Court decided, first, in 1948,. that a patent licensing program that fixed prices of many licensees and regimented an entire industry violated the antitrust laws, and then, decided in 1950,. after a remand, that appropriate relief in such cases did not extend so far as to permit licensees enjoying a compulsory, reasonable–royalty license to challenge the validity of the licensed patents. The Court also ruled, in obiter dicta, that the United States had standing to challenge the validity of patents when a patentee relied on the patents to justify its fixing prices. It held in this case, however, that the defendants violated the antitrust laws irrespective of whether the patents were valid, which made the validity issue irrelevant.
Background
The corporate defendants are manufacturers of gypsum products, including gypsum plasterboard, gypsum lath, gypsum wallboard, and gypsum plaster. they sold nearly all of the first three products marketed in states east of the Rocky Mountains ("the eastern area"), and a substantial portion of the plaster sold in the same area, with annual sales of approximately $42 million. Since its organization in 1901, United States Gypsum has been the dominant concern in the gypsum industry. In 1939, it sold 55% of all gypsum board in the eastern area.United States Gypsum Co., 333 U.S. at 368.
By internal development and purchase from others, United States Gypsum acquired the most significant patents covering the manufacture of gypsum board. Beginning in 1926, United States Gypsum offered licenses under its patents to other manufacturers in the industry. Since 1929, all of United States Gypsum's licenses contained a provision that United States Gypsum should fix the minimum price at which the licensee sold gypsum products embodying the patents. Since 1929, United States Gypsum has fixed prices at which the other corporate defendants have sold their gypsum board.333 U.S. at 368–69. The other corporate defendants are National Gypsum Co., Certain-teed Products Corp., Celotex Corp., Ebsary Gypsum Co., and Newark Plaster Co. In addition, Texas Cement Plaster Co. is an unincorporated business and its owner Gloyd is an individual defendant. The seven individual defendants are the presidents of the corporate defendants. 333 U.S. at 369.
Prior to 1912, gypsum board was manufactured with an open edge, leaving the gypsum core exposed on all four sides. In 1912, United States Gypsum acquired a patent covering both process and product claims on gypsum board with closed edges, the paper liner being folded over the exposed gypsum core. Closed-edge board was superior in quality to open-edge board, as it was cheaper to manufacture, did not break so easily in shipment, and was less subject to crumbling at the edges when nailed in place. Subsequently, United States Gypsum acquired a number of other patents relating to the process of making closed-edge board.333 U.S. at 370–71.
In the 1920s and 1930, United States Gypsum sued a number of gypsum board manufacturers for patent infringement, prevailed in the litigation, and settled with the defendants by granting them licenses with price-fixing clauses. Since 1937 United States Gypsum has maintained rigid control over the price and terms of sale of all gypsum board.333 U.S. at 371–72. The license agreements provided that royalties should be paid on the sales of all board sold, patented or unpatented. This provision tended to discourage any production of unpatented board because it was more costly to manufacture than the patented board.333 U.S. at 385.
District court ruling
In August 1940 the United States Government filed a civil antitrust complaint against United States Gypsum and the other defendants in the United States District Court for the District of Columbia. The complaint charges that the defendants have been engaged in a combination and conspiracy in restraint of trade and commerce in gypsum products, which the defendants "carried out in connection with certain patent license agreements based on patents owned by the United States Gypsum Company covering the manufacture of gypsum board." The defendants relied on these patents as a legitimate basis for "establishing prices and terms of sale of gypsum board within the doctrine of United States v. General Electric Company, 1926, 272 U.S. 476."
As a preliminary matter, the court addressed the question whether the Government had standing to seek invalidation of a patent because it was used as a means of fixing prices and committing other antitrust violations. In this connection, the government pointed to the provisions in the licenses that forbid the licensees from challenging the validity of the licensed patents. "[I]n the circumstances of the instant case," the Government said, "no one outside the group of licensee defendants is likely to hazard the expense necessary to make an effective challenge against 'a powerful combination carefully fenced in behind, not one, but many patents in the art.' " The court rejected the argument, maintaining that "there is nothing inherently unclean about an agreement by a licensee not to contest the validity of his licensor's patent."53 F. Supp. at 898–99. More fundamentally, the court said, "The attack upon the validity of the patents under paragraph 46(a) involves a breach, as between the Government and the patentees and those dealing with the patentees, of the Government's grant." It is a "broken promise." It does not matter that the patents were allegedly misused to restrain trade. "That the defendants may be shown to have misused the patents is no warrant for the Government's repudiating its own assurance that they were issued upon due examination and according to law and conferred an exclusive right for a given period of years."53 F. Supp. at 900–01.
The case then proceeded to trial and the Government offered its evidence. The trial began in November 1943 and continued, with interruptions, to April 1944. At the close of the Government's case the defendants moved to strike from the record all of the exhibits and testimony received subject to connection, on the ground that no prima facie showing of any conspiracy had been made, that such exhibits and testimony had not been shown to be in furtherance or in execution of any conspiracy, and that such exhibits had not otherwise been connected to the alleged conspiracy. The defendants moved also to dismiss the complaint on the ground that upon the facts and the law the plaintiff had shown no right to relief. By an order dated June 15, 1946, the court granted the defendants' motion to dismiss.
The court said that there were two principal issues of fact in the case. The first is whether the license agreements entered into by the defendants were "bona fide patent license agreements" or instead just entered into 'to give color of legality to a combination to restrain trade in violation of the Sherman Act." The court said the licenses were patterned after the GE–Westinghouse agreements of the 1926 General Electric case, "which in that case were sanctioned by the Supreme Court." The court said that the "General Electric decision holds that this is not illegal." The court observed that attorneys for the corporate defendants told them "that license agreements giving price control to the licensor were proper and that they had a right to enter into them under the patent laws."67 F. Supp. at 457–58, 460. The court also concluded that the licensees entered into the license agreements in good faith and "not as sham agreements to disguise illegal purposes."67 F. Supp. at 471.
The court then asked:
Were the license agreements . . . executed with intent to accomplish restraints of trade beyond the proper limits of the patent monopoly, specifically (1) to raise and fix at arbitrary and non-competitive levels the price of gypsum board; (2) to accomplish improper standardization of gypsum board and its method of production; (3) to raise, maintain and stabilize the level of prices of unpatented materials—plaster and miscellaneous gypsum products; (4) to effectuate improper restriction upon distribution of gypsum board, plaster and miscellaneous gypsum products; or (5) to fix the prices at which manufacturing distributors resell gypsum board?
The court said:
[Some licensees] were no doubt in part motivated not only by the desire to make closed-edge board and to settle or avoid litigation, but also by the expectation that the exercise of its price fixing right by USG as licensor would result in a price advance. . . . Indeed, it is not in dispute that it was the hope and expectation of the several prospective licensees that board prices would advance, and that they would be stabilized in the sense that each licensee together with the licensor would be selling, at a given time, at the minimum prices fixed by the licensor.67 F. Supp. at 473.
But that does bot show intent to fix prices, the court said. "It is not illegal for parties negotiating a patent license agreement to hope, expect, or intend that the normal economic consequences of patent licensing will follow execution of the license," i.e., "a stabilized and presumably profitable price for the patented product." In short, the court said. "We conclude in respect of the second aspect of the first question of fact in the case that the evidence fails to show that the license agreements were executed with intent to gain objectives beyond the proper limits of a patent monopoly in any of the respects charged."67 F. Supp. at 484. The court also concluded "that the evidence fails to establish that the operations of the defendants were carried beyond the proper limits of the patent monopoly and licensing thereunder," and they did not go "beyond the activities contemplated by the agreements as written and into the field denounced by the Sherman Act."67 F. Supp. at 500.
Finally, the court considered the Government's argument that the defendants acted in concert to blanket the industry under license agreements that would fix and stabilize prices. Assuming that true, the court insisted that the 1926 General Electric case permitted that conduct:
Given a right under the patent law to grant a plurality of bona fide licenses with price control provisions but no objectives beyond the proper limits of a patent monopoly, it can make no difference in either totality of actual restraint, or in law, whether the several licenses are executed with, or without, prearrangement between the patentee and the prospective licensees as a group.67 F. Supp. at 504.
The court therefore granted the motion to dismiss the case.
Supreme Court ruling
Justice Stanley F. Reed delivered the opinion of the Court. Justice Felix Frankfurter filed a concurring opinion because he disagreed with part of the majority opinion.Justices Robert Jackson and Tom C. Clark recused themselves because they had been involved in the case at the Department of Justice.
Majority opinion The Court stated that the defendants had admitted "that, in the absence of whatever protection is afforded by valid patents, the licensing arrangements described would be in violation of the Sherman Act." This led the Government seek to establish the invalidity of the patents, but "the trial court held that the government was estopped to attack the validity of the patents in the present proceeding, on the ground that such attack would constitute a review of action by the Commissioner of Patents which was not authorized by statute." The Court said that this issue was not necessary to decide, the conduct being illegal irrespective of patent validity, but the Court disagreed with the district court's reasoning. Therefore, "it seems inadvisable to leave the decision as a precedent."United States v. United States Gypsum Co., 333 U.S. at 386–87.