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Sola Electric Co. v. Jefferson Electric Co.

U.S.
Dec 7, 1942
317 U.S. 173 (1942)

Summary

holding that local laws of estoppel are not applicable where the defense asserted in a diversity contract action is based on federal law

Summary of this case from Rothberg v. Rosenbloom

Opinion

CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SEVENTH CIRCUIT.

No. 45.

Argued October 23, 1942. Decided December 7, 1942.

1. Where, owing to the invalidity of a patent, a price-fixing stipulation in a license to manufacture the patented article and to sell it in interstate commerce is in conflict with the Sherman Law, the licensee is not estopped to set up the invalidity against the licensor in a suit by the latter to recover royalties and to enjoin sales not in conformity with the license agreement. P. 175. 2. This question of estoppel is a federal question. P. 175. Local rules of estoppel will not be permitted to thwart the purposes of statutes of the United States. Erie R. Co. v. Tompkins, 304 U.S. 64, distinguished. P. 176. 125 F.2d 322, reversed.

CERTIORARI, 316 U.S. 652, to review a judgment affirming the District Court in upholding a price-fixing provision in a patent license agreement, and dismissing a counterclaim.

Mr. J. Bernhard Thiess, with whom Messrs. Sidney Neuman and Leslie W. Fricke were on the brief, for petitioner.

Mr. Thomas H. Sheridan for respondent.


The question for our decision is whether a patent licensee, by virtue of his license agreement, is estopped to challenge a price-fixing clause in the agreement by showing that the patent is invalid, and that the price restriction is accordingly unlawful because not protected by the patent monopoly.

Respondent brought the present suit in the District Court for the Northern District of Illinois, asserting diversity of citizenship, and alleging that it was the owner of Patent No. 1,777, 256 for improvements in an electrical transformer; that it had entered into a license contract granting petitioner a non-exclusive license to manufacture and sell the patented transformers throughout the United States, its territories, dependencies and possessions, on payment of a stipulated royalty upon each transformer so manufactured and sold. The contract provided that the license was granted on condition that the "prices, terms, and conditions of sale, for use or sale" throughout the licensed territory should not be more favorable to petitioner's customers than those prescribed from time to time by respondent for its own sales and those of its other licensees. Respondent sought recovery of unpaid royalties and also an injunction restraining further sales except in conformity to the terms of the license agreement.

Petitioner by its answer admitted that it had manufactured two types of transformers, one covered by certain narrow claims of the patent, claims 8, 14 and 19, the validity of which it does not challenge, the other alleged to be covered by certain broader claims. Petitioner also filed a counterclaim alleging that the broad claims are invalid for want of novelty, as it asserted had been recognized in the Sixth Circuit in France Mfg. Co. v. Jefferson Electric Co., 106 F.2d 605; and that respondent, by reason of the price control provisions of the licensing contract and the invalidity of the broad claims, was not entitled to recover royalties upon those transformers covered only by the broad claims. Petitioner accordingly prayed a declaratory judgment that most of the claims, except 8, 14 and 19, are invalid, and for other relief.

The Circuit Court of Appeals for the Seventh Circuit affirmed the District Court's order dismissing the counterclaim, 125 F.2d 322, ruling that petitioner, having accepted a license under the patent, was estopped to deny its validity. And, treating the patent as valid, it held that the stipulation for control of the sales price of the patented articles manufactured by the licensee was a lawful exercise of the patent monopoly. We granted certiorari, 316 U.S. 652, the question being of importance to the administration of the patent laws and the Sherman Anti-Trust Act.

The Circuit Court of Appeals, in holding that petitioner as a licensee was estopped to challenge the validity of the patent, did not say whether it considered that it was applying a rule of federal or of state law, and it cited no decisions of either the federal or the Illinois courts. Where no price-fixing stipulation was involved in the license contract, this rule of estoppel, which was not questioned by counsel, was applied without discussion in United States v. Harvey Steel Co., 196 U.S. 310; cf. Kinsman v. Parkhurst, 18 How. 289. We need not decide whether in such a case the rule is one of local law, cf. Dale Tile Mfg. Co. v. Hyatt, 125 U.S. 46, 53-54, or whether, if it be regarded as a rule of federal law because the construction and application of the patent laws are involved, it was rightly applied in United States v. Harvey Steel Co., supra. For here a different question is presented — whether the doctrine of estoppel as invoked below is so in conflict with the Sherman Act's prohibition of price-fixing that this Court may resolve the question even though its conclusion be contrary to that of a state court.

The present license contract contemplates and requires that petitioner, on sales of the licensed transformers throughout the United States, shall conform to the prices fixed by respondent for the sale of competing patented articles by other licensees and by respondent. Such a restriction on the price of articles entering interstate commerce is a violation of the Sherman Act save only as it is within the protection of a lawfully granted patent monopoly. See United States v. Univis Lens Co., 316 U.S. 241, 250, and cases cited; United States v. Masonite Corp., 316 U.S. 265, 275-77. Agreements fixing the competitive sales price of articles moving interstate, not within the protection of a patent, are unlawful because prohibited by the Sherman Act.

It is familiar doctrine that the prohibition of a federal statute may not be set at naught, or its benefits denied, by state statutes or state common law rules. In such a case our decision is not controlled by Erie R. Co. v. Tompkins, 304 U.S. 64. There we followed state law because it was the law to be applied in the federal courts. But the doctrine of that case is inapplicable to those areas of judicial decision within which the policy of the law is so dominated by the sweep of federal statutes that legal relations which they affect must be deemed governed by federal law having its source in those statutes, rather than by local law. Royal Indemnity Co. v. United States, 313 U.S. 289, 296; Prudence Corp. v. Geist, 316 U.S. 89, 95; Board of Comm'rs v. United States, 308 U.S. 343, 349-50; cf. O'Brien v. Western Union Telegraph Co., 113 F.2d 539, 541. When a federal statute condemns an act as unlawful, the extent and nature of the legal consequences of the condemnation, though left by the statute to judicial determination, are nevertheless federal questions, the answers to which are to be derived from the statute and the federal policy which it has adopted. To the federal statute and policy, conflicting state law and policy must yield. Constitution, Art. VI, cl. 2; Awotin v. Atlas Exchange Bank, 295 U.S. 209; Deitrick v. Greaney, 309 U.S. 190, 200-01.

The federal courts have been consistent in holding that local rules of estoppel will not be permitted to thwart the purposes of statutes of the United States. See, in the case of federal statutes governing interstate freight rates, Pittsburgh, C., C. St. L. Ry. Co. v. Fink, 250 U.S. 577, 582-83; Chesapeake Ohio Ry. Co. v. Martin, 283 U.S. 209, 220-22; cf. Atchison, T. S.F. Ry. Co. v. Harold, 241 U.S. 371; and federal statutes affecting national banks, Awotin v. Atlas Exchange Bank, supra; Deitrick v. Greaney, supra.

A state by applying its own law of specific performance may not compel the performance of a contract contemplating violation of the federal land laws, Anderson v. Carkins, 135 U.S. 483. Similarly, this Court has declared that anyone sued upon a contract may set up as a defense that it is in violation of the Sherman Act. Bement v. National Harrow Co., 186 U.S. 70, 88. And it has proceeded on the assumption that whether the parties to an agreement in violation of the Act are in pari delicto is a question of federal, not state, law. Harriman v. Northern Securities Co., 197 U.S. 244; Eastman Kodak Co. v. Southern Photo Co., 273 U.S. 359, 376-78. It decided, in Continental Wall Paper Co. v. Voight Sons Co., 212 U.S. 227, that a vendee of goods purchased from an illegal combination in pursuance of an illegal agreement, both in violation of the Sherman Act, can plead the illegality in defense to a suit for the purchase price. This decision went much further than it is necessary to go here to conclude that petitioner may assert the illegality of the price-fixing agreement and may offer any competent evidence to establish its illegality, including proof of the invalidity of the patent.

Local rules of estoppel which would fasten upon the public as well as the petitioner the burden of an agreement in violation of the Sherman Act must yield to the Act's declaration that such agreements are unlawful, and to the public policy of the Act which in the public interest precludes the enforcement of such unlawful agreements. Cf. Morton Salt Co. v. Suppiger Co., 314 U.S. 488, 492-93.

Reversed.


Summaries of

Sola Electric Co. v. Jefferson Electric Co.

U.S.
Dec 7, 1942
317 U.S. 173 (1942)

holding that local laws of estoppel are not applicable where the defense asserted in a diversity contract action is based on federal law

Summary of this case from Rothberg v. Rosenbloom

holding that violation of Sherman Anti–Trust Act of 1890, 15 U.S.C. §§ 1 –7, precluded enforcement of contract requiring price fixing

Summary of this case from Grogan v. Seattle Bank

In Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173 (1942), the majority refused to permit a licensor to enforce the license's price-fixing provisions without permitting the licensee to contest the validity of the underlying patent.

Summary of this case from Lear, Inc. v. Adkins

In Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173, a patent licensee defended against a suit for unpaid royalties by attacking the validity under the Sherman Act of a price-fixing stipulation in his license.

Summary of this case from Liner v. Jafco, Inc.

In Sola Elec. Co. v. Jefferson Elec. Co., 317 U.S. 173, 175, 63 S.Ct. 172, 87 L.Ed. 165 (1942), holding that a patent licensee defending a licensor's action for deviation from fixed prices could not be barred by state doctrines of estoppel from challenging the validity of the patent, the Supreme Court declined to decide whether in a case not involving the antitrust laws estoppel of a licensee would be an issue of state or of federal law.

Summary of this case from Artvale, Inc. v. Rugby Fabrics Corp.

In Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173, 63 S.Ct. 172, 87 L.Ed. 165, the court (to the surprise of the patent bar generally) held that the so-called implied estoppel of a patent licensee, to question the validity of the patent under which he is licensed, is inoperative, even if the estoppel would otherwise be effective under federal or state law, when the license agreement contains a provision fixing prices, since such a provision, should the patent be not valid, will violate the Sherman Act, 15 U.S.C.A. §§ 1-7, 15 note.

Summary of this case from Nachman Spring-Filled Corp. v. Kay Mfg. Co.

In Sola Electric Co. v. Jefferson Electric Co., 1942, 317 U.S. 173, 63 S.Ct. 172, 87 L.Ed. 165, the licensee complained of a price fixing stipulation which violated the Sherman Act if it were not within the protection of patent monopoly, and was permitted to dispute the validity of the patent licensed to it.

Summary of this case from H-P-M Development Corporation v. Watson-Stillman Co.

noting "rules of estoppel will not be permitted to thwart the purposes of statutes of the United States."

Summary of this case from Dow Chemical Co. v. Ebling

In Sola Electric Co. v. Jefferson Co. (317 U.S. 173, 176) the court says: "It is familiar doctrine that the prohibition of a federal statute may not be set at naught, or its benefits denied, by state statutes or state common law rules. * * * When a federal statute condemns an act as unlawful, the extent and nature of the legal consequences of the condemnation, though left by the statute to judicial determination, are nevertheless federal questions, the answers to which are to be derived from the statute and the federal policy which it has adopted.

Summary of this case from Jerome v. Yudt
Case details for

Sola Electric Co. v. Jefferson Electric Co.

Case Details

Full title:SOLA ELECTRIC CO. v . JEFFERSON ELECTRIC CO

Court:U.S.

Date published: Dec 7, 1942

Citations

317 U.S. 173 (1942)

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