Mannington Mills, Inc. v. Congoleum Corporation

Alleging that foreign patents were secured by fraud, which if perpetrated in securing a domestic patent would lead to antitrust liability, plaintiff seeks treble damages and injunctive relief. The district court dismissed the complaint, relying primarily upon the act of state doctrine. We conclude that in this instance that ground does not bar consideration of plaintiff's claim. Because we determine, however, that in deciding whether jurisdiction should be exercised the district court should weigh the enforcement of the antitrust laws against the interests of comity and international relations, we remand for the development of an adequate record.

Congoleum Corporation holds American patents for the manufacture of chemically embossed vinyl floor covering and owns corresponding patents in some 26 foreign countries. Mannington Mills, Inc., too, is in the business of manufacturing flooring and is licensed to use the Congoleum patents in this country. Although Mannington claimed to have similar rights under the foreign patents, that contention was decided adversely in companion litigation, Mannington Mills, Inc. v. Congoleum Industries, Inc., 197 U.S.Pat.Q. 145 (D.N.J.1977), and Congoleum has instituted infringement suits against Mannington in New Zealand, Canada, Australia, and Japan.

In 1974, Mannington filed suit in the district court of New Jersey alleging, Inter alia, that Congoleum's licensing practices in the overseas markets violated § 2 of the Sherman Antitrust Act, 15 U.S.C. § 2. Summary judgment on the antitrust claim was entered in favor of the defendant and the case is presently on appeal. Mannington had sought to amend its complaint in that suit by adding allegations of Congoleum's fraud in securing its foreign patents. The district court denied leave to amend the complaint as to this specific contention. Thereafter, Mannington filed the present action based on essentially the same grounds. The district court dismissed the complaint for failure to state a claim and also declined to exercise jurisdiction in a pendent state unfair competition count.

Mannington's complaint alleges that Congoleum made fraudulent representations to various foreign patent offices in the following general categories:

1. False statements about the reactions and performance of some of the chemical components of the vinyl flooring;

2. Misrepresentation of test data;

3. Suppression of information critical to the practice of the invention;

4. Misleading statements about the status and contents of the United States patent applications.

The complaint charges that Congoleum enforced the foreign patents by bringing and threatening the institution of infringements suits in foreign countries. This activity allegedly restrained the export trade of the United States by restricting the foreign business of Mannington and other American competitors in addition to demonstrating an intent to monopolize. Mannington asserts further that Congoleum's false claims of priority dates were in violation of the Paris Convention of March 20, 1883, As amended, (1962) 13 U.S.T. 1, and the Pan-American Convention of August 20, 1910, 38 Stat. 1811.

The district court held that since no private right of action was set out in the treaties no relief could be granted. The antitrust count was dismissed on the grounds that the validity of the foreign patents was to be determined by the courts of the respective issuing nations and there was no necessity for American firms to apply for foreign patents in any way other than as established by the respective nations. The court stated that to enjoin Congoleum from enforcing its foreign patents in other nations against Mannington would violate the act of state doctrine.

Mannington emphasizes that it is not challenging the right of a foreign government to confer patents under its own requirements and indeed does not seek to have the patents at issue adjudged invalid. Rather, its claims are said to arise out of breach of standards imposed by American law and thus are properly determinable in the district court. Mannington argues that use of the United States courts to resolve antitrust claims stemming from fraud in the procurement of patents abroad is consistent with the extraterritorial jurisdiction of the Sherman Act, and litigation in a single forum furthers judicial efficiency. Congoleum contends, however, that Mannington's theory for antitrust relief is barred by the act of state doctrine, and subjecting a putative patentee to United States standards for foreign patent procurement is an unwarranted extension of the antitrust laws.

* JURISDICTION

We turn first to the question of jurisdiction. Both parties are subject to service of process in New Jersey and in personam jurisdiction is concededly present. What is at issue, however, is subject matter jurisdiction.

The challenge here is to conduct by an American corporation in a foreign country, arguably legal there, and the issue is whether that activity is answerable in the courts of the United States under the Sherman Act's broad and potentially far-reaching language. The extraterritorial application of the Act to "trade or commerce . . . with foreign nations" has been and continues to be the subject of lively controversy. See, e.g., Kintner & Griffin, Jurisdiction Over Foreign Commerce Under the Sherman Antitrust Act, 18 B.C.Ind. & Com.L.Rev. 199 (1977). Neither the Act nor its legislative history gives any clear indication of the scope of the extraterritorial jurisdiction conferred, leaving such determination to the courts. Id. at 200-19; See Ongman, "Be No Longer a Chaos:" Constructing a Normative Theory of the Sherman Act's Extraterritorial Jurisdictional Scope, 71 Nw. U.L. Rev. 733, 735-41 (1977).

Justice Holmes's opinion in American Banana Co. v. United Fruit Co., 213 U.S. 347, 29 S.Ct. 511, 53 L.Ed. 826 (1909), cast doubt on the intent of Congress to extend the Sherman Act to action perpetrated beyond United States territory. Since then, however, the Supreme Court has made it clear that "foreign commerce" applies to importing, exporting, and other commercial transactions, as well as transportation and communication between the United States and a foreign country.1 Acts and agreements occurring outside the territorial boundaries of the United States that adversely and materially affect American trade are not necessarily immune from United States antitrust laws. Timken Roller Bearing Co. v. United States, 341 U.S. 593, 71 S.Ct. 971, 95 L.Ed. 1199 (1951); United States v. National Lead Co., 332 U.S. 319, 67 S.Ct. 1634, 91 L.Ed. 2077 (1947); United States v. Sisal Sales Corp., 274 U.S. 268, 47 S.Ct. 592, 71 L.Ed. 1042 (1927); Thomsen v. Cayser, 243 U.S. 66, 37 S.Ct. 353, 61 L.Ed. 597 (1917); United States v. Pacific & Arctic Railway & Navigation Co., 228 U.S. 87, 33 S.Ct. 443, 57 L.Ed. 742 (1913).

In oft-quoted language, Judge Learned Hand in United States v. Aluminum Co. of America (Alcoa), 148 F.2d 416, 443-45 (2d Cir. 1945), concluded that although Congress did not intend the Sherman Act to prohibit conduct having no effect in the United States, it did intend the Act to reach conduct having consequences within this country even where the parties concerned had no allegiance to the United States if the conduct is intended to and actually does have an effect upon United States imports or exports. This wide-reaching "intended effects" test has been cited with approval by the Supreme Court. See, e.g., Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 705, 82 S.Ct. 1404, 8 L.Ed.2d 777 (1962). See also Restatement (Second) of the Foreign Relations Law of the United States § 18 (1965).

It can no longer be doubted that practices of an American citizen abroad having a substantial effect on American foreign commerce are subject to the Sherman Act. As was observed in Steele v. Bulova Watch Co., 344 U.S. 280, 282, 73 S.Ct. 252, 254, 97 L.Ed. 252 (1952), a case involving trademark infringement under the Lanham Trade-Mark Act of 1946, 15 U.S.C. §§ 1051-1127, "Congress in prescribing standards of conduct for American citizens may project the impact of its laws beyond the territorial boundaries of the United States." This view has been criticized because its failure to abide by the basic tenet that a nation's legislation is valid only in the territory it governs leads to unnecessary international friction.2 Nevertheless, when two American litigants are contesting alleged antitrust activity abroad that results in harm to the export business of one, a federal court does have subject matter jurisdiction. Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 89 S.Ct. 1562, 23 L.Ed.2d 129 (1969). Therefore, we are satisfied that the district court did have jurisdiction in this case.

The defendant relies heavily upon the act of state doctrine but we conclude that it does not preclude adjudication of Mannington's claims. The doctrine is a policy of judicial abstention from inquiry into the validity of an act by a foreign government. The premise upon which it rests is that an act by the sovereign power of a foreign state or by its authorized agent in its own territory and within the scope and authority of the office cannot be questioned or made the subject of legal proceedings in our courts. Similar to, and thought to be derived from the concept of sovereign immunity, the act of state doctrine has a distinguishing characteristic in that it can be invoked as a defense by a private litigant.

In one of the earliest expressions of this doctrine, Chief Justice Fuller in Underhill v. Hernandez, 168 U.S. 250, 252, 18 S.Ct. 83, 84, 42 L.Ed. 456 (1897) said:

"Every sovereign State is bound to respect the independence of every other sovereign State, and the courts of one country will not sit in judgment on the acts of the government of another done within its own territory."

In later years, there was a shift in focus from the notions of sovereignty and the dignity of independent nations recognized in Underhill and in American Banana Co. v. United Fruit Co., supra, to concerns for preserving the "basic relationships between branches of government in a system of separation of powers," and not hindering the executive's conduct of foreign policy by judicial review or oversight of foreign acts. Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 423, 84 S.Ct. 923, 938, 11 L.Ed.2d 804 (1964). Another more recent view is that the doctrine is based on notions of comity and a conflict of laws theory that foreign law is to be accepted as the rule of decision in passing upon acts occurring within the foreign power's jurisdiction. Note, Sherman Act Jurisdiction and the Acts of Foreign Sovereigns, 77 Colum.L.Rev. 1247, 1255 & n.36 (1977).

But whatever its theoretical foundation, by precluding inquiry into the validity of a foreign sovereign's act, the doctrine requires American courts to reject private claims based on the contention that the damaging act of another nation violates either American or international law.3 That preclusion is not lightly to be imposed and to determine whether the act of state doctrine applies in a given factual context, the court must analyze the nature of the questioned conduct and the effect upon the parties in addition to appraising the sovereign's role. See Restatement (Second) of Foreign Relations Law, Supra § 41, Comment d.

Cases involving confiscatory measures taken by foreign sovereigns provided the first opportunities to apply the doctrine and until recent years courts seldom referred to the subject in antitrust litigation. Timberg, Sovereign Immunity and Act of State Defenses: Transnational Boycotts and Economic Coercion, 55 Texas L.Rev. 1 (1976); See also Note, 69 Mich.L.Rev. 888 (1971). In the typical confiscation situation based on a foreign state's expropriation of property rights or its repudiation of contractual obligations, only private rights are sought to be vindicated. In antitrust litigation, however, in addition to claims of private injury, there is a public interest in clearing monopolistic activities from the channels of American commerce.

Similar in effect but somewhat conceptually distinct is the defense of foreign compulsion which shields from antitrust liability the acts of parties carried out in obedience to the mandate of a foreign government. The sovereign compulsion defense is not principally concerned with the validity or legality of the foreign government's order, but rather with whether it compelled the American business to violate American antitrust law. Thus, in Interamerican Refining Corp. v. Texas Maracaibo, Inc., 307 F.Supp. 1291 (D.Del.1970), the defendant was held not responsible for a boycott forced upon it by the Venezuelan government. See Michigan Note, Supra ; Note, Export Policy, Antitrust and the Arab Boycott, 51 N.Y.U.L.Rev. 94, 125-31 (1976). See also Fugate, Antitrust Jurisdiction and Sovereign Immunity, 49 Va.L.Rev. 925, 934-37 (1963); Antitrust Division, U.S. Dept. of Justice, Antitrust Guide for International Operations (Jan. 26, 1977) (Antitrust Guide). One asserting the defense must establish that the foreign decree was basic and fundamental to the alleged antitrust behavior and more than merely peripheral to the overall illegal course of conduct. In United States v. Sisal Sales Corp., supra, for example, the Court concluded that Mexican legislation solicited by American banks to facilitate the establishment of a cartel that monopolized United States imports was not a sufficiently coercive act by a foreign government to justify the banks' Sherman Act violations. In that instance, foreign governmental activity was in reality involvement arranged by the defendants rather than independently conceived legislation directed toward an essential part of the violations.

Where the governmental action rises no higher than mere approval, the compulsion defense will not be recognized. It is necessary that foreign law must have coerced the defendant into violating American antitrust law. Continental Ore Co. v. Union Carbide & Carbon Corp., supra; Timberlane Lumber Co. v. Bank of America, 549 F.2d 597 (9th Cir. 1976). The defense is not available if the defendant could have legally refused to accede to the foreign power's wishes, United States v. Watchmakers of Switzerland Information Center, Inc., 1963 Trade Cases (CCH) P 70,600 (S.D.N.Y.1962), Order modified, 1965 Trade Cases (CCH) P 71,352 (S.D.N.Y.1965). See W. Fugate, Foreign Commerce and the Antitrust Laws 75-82 (rev. ed. 1973).

The defendant here contends that, whether valid or invalid, the grants of foreign patents could be accomplished only by affirmative governmental actions and therefore are acts of state which American courts are not free to examine. We are unable to accept the proposition that the mere issuance of patents by a foreign power constitutes either an act of state, as that term has developed under case law, or an example of governments' compulsion.

There is no allegation of collusion with foreign governments in securing the patents, nor was the defendant compelled to refuse a license to the plaintiff. See, e. g., Continental Ore Co. v. Union Carbide & Carbon Corp., supra, 370 U.S. at 706, 82 S.Ct. 1404; Occidental Petroleum Corp. v. Buttes Gas & Oil Co., 331 F.Supp. 92 (C.D.Cal.1971), Aff'd per curiam,461 F.2d 1261 (9th Cir.), Cert. denied, 409 U.S. 950, 93 S.Ct. 272, 34 L.Ed.2d 221 (1972). Thus, by issuance of the patents per se, the foreign governments did not force the defendant to exclude the plaintiff from the foreign markets and the defense of compulsion is not available.

The case Sub judice also fails to fall within the more traditional applications of the act of state doctrine. The grant of a patent is quite different from an act of expropriation by a government. See Banco Nacional de Cuba v. Sabbatino, supra; American Banana Co. v. United Fruit Co., supra; Hunt v. Mobil Oil Corp., 550 F.2d 68 (2d Cir.), Cert. denied, 434 U.S. 984, 98 S.Ct. 608, 54 L.Ed.2d 477 (1977). In those instances, moreover, the crucial acts occurred as a result of a considered policy determination by a government to give effect to its political and public interests matters that would have significant impact on American foreign relations. See Restatement (Second) of Foreign Relations Law, Supra § 41. Those situations may be distinguished from the failure to pay an ordinary commercial debt, Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682, 695-97, 96 S.Ct. 1854, 48 L.Ed.2d 301 (1976) (plurality opinion) or the determination of a security interest in litigation between private parties in a foreign nation's court. Timberlane Lumber Co. v. Bank of America, supra at 605-08. In each of the foregoing instances, an act of state defense was denied.4 See also United States v. Imperial Chemical Industries, Ltd., 100 F.Supp. 504 (S.D.N.Y.1951) (patent rights).

The grant of patents for floor coverings is not the type of sovereign activity that would be of substantial concern to the executive branch in its conduct of international affairs. Although enforcement of a decree in the present litigation may possibly present problems of international relations, as will be discussed Infra, the granting of the patents per se, in substance ministerial activity, is not the kind of governmental action contemplated by the act of state doctrine or its correlative, foreign compulsion. We conclude, therefore, that the asserted act of state defense does not support dismissal of plaintiff's complaint and it does not apply to the patents issued in the foreign countries.

COMITY, ABSTENTION AND INTERNATIONAL REPERCUSSIONS

Having concluded that the act of state doctrine is not applicable in these circumstances and that there is subject matter jurisdiction, the question remains whether jurisdiction should be exercised. Cf. SEC v. Kasser, 548 F.2d 109 (3d Cir.), Cert. denied, 431 U.S. 938, 97 S.Ct. 2649, 53 L.Ed.2d 255 (1977); Straub v. Vaisman & Co., 540 F.2d 591 (3d Cir. 1976). See also Beausang, The Extraterritorial Jurisdiction of the Sherman Act, 70 Dick.L.Rev. 187 (1966); Ongman, "Be No Longer A Chaos," supra.

Some analysis of the plaintiff's position is helpful in identifying the considerations bearing on this issue. Essentially, the plaintiff seeks to extend the doctrine of Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 86 S.Ct. 347, 15 L.Ed.2d 247 (1965), a case alleging a domestic patent antitrust violation, to an international setting. In Walker, the Supreme Court held that a company which had engaged in monopolistic activity was subject to Sherman Act liability when the conduct had been carried on under the shield of a patent obtained from the United States Patent Office by intentional fraud. The Court observed that a patent provides an exception to the general rule against monopolies but proof of knowing and wilful misrepresentation of facts to the patent office strips the patentee of its exemption. In that event, if the plaintiff can prove the other elements of a Sherman Act § 2 violation in addition to invalidity of the patent, then it is entitled to recover treble damages.

Mannington seeks to apply the same rationale here, although it is not attacking Congoleum's American patents but only its corresponding ones abroad. Mannington asserts that it need not prove the invalidity of the foreign patents under the issuing countries' laws. It argues that they were obtained by conduct considered fraudulent under American law and would expose Congoleum to antitrust liability in this country if domestic patents were at issue. Therefore, says Mannington, it is not necessary to examine the patent law of 26 foreign countries to determine if the Congoleum patents are valid there.

Walker, of course, did not go so far. It held only that a patent invalid under American law because of fraud may expose the defendant to American antitrust penalties.5 Mannington urges that a patent, even though valid under the law of a foreign nation, cannot act as an exemption for antitrust liability if procured by conduct unacceptable by American standards. Mannington would hold Congoleum liable for its activity abroad that impaired plaintiff's foreign business or barred it from competition in a nation altogether. In short, Mannington presses us to apply the same reach to the Sherman Act as did the Court to the Lanham Act in Steele v. Bulova Watch Co., supra. In that case, an American company sued an American citizen in a United States court alleging that the use of a trademark registered in Mexico and imprinted there on articles, some of which found their way to the United States, violated United States law. Before the case reached the Supreme Court, however, the Mexican government nullified its registration. As the Court acknowledged:

"(T)here is thus no conflict which might afford petitioner a pretext that such relief would impugn foreign law. The question, therefore, whether a valid foreign registration would affect either the power to enjoin or the propriety of its exercise is not before us. Where, as here, there can be no interference with the sovereignty of another nation, the District Court in exercising its equity powers may command persons properly before it to cease or perform acts outside its territorial jurisdiction." Id. at 289, 73 S.Ct. at 257.

If it be assumed that the foreign patents are invalid under the issuing countries' laws because of intentional fraud, then it would seem proper to extend Walker to cover the situation, at least in the absence of antitrust legislation in the foreign nation. But Mannington's position requires that we take as a premise that patents are enforceable in the foreign countries and that the fraud, perhaps because of irrelevance to foreign patent requirements or of inability to satisfy a "but for" test, See e.g., Corning Glass Works v. Anchor Hocking Glass Corp., 253 F.Supp. 461 (D.Del.1966), Rev'd on other grounds, 374 F.2d 473 (3d Cir.), Cert. denied, 389 U.S. 826, 88 S.Ct. 65, 19 L.Ed.2d 80 (1967), is insufficient under foreign law to constitute grounds for invalidity.

In addition to treble damages, Mannington asks that Congoleum be enjoined from enforcing these hypothetically valid patents in the foreign jurisdictions. Obviously, some potential for conflict with the policy of foreign nations is present in both forms of relief.

A judgment against Congoleum in this country would have direct and ripple effects abroad. It is not unusual for other nations to condition the issuance of patents upon certain requirements, E.g., that the article be manufactured in that country; that it be actively "worked"; or that licenses be restricted in various ways, or at the other extreme, be compulsory. It may be also that some nations might require that the patent be enforced. Nationals may be preferred over foreigners or patent laws may have been designed to develop the technical know-how of an underdeveloped country. See Wayman, Patent Protection in International Business Transactions, 45 Den. L.J. 64 (1968). Many of these policies could be frustrated by a decree of an American court which, in effect, declares the foreign patent invalid both by American standards and as it may affect American commerce.

This may, indeed, be a situation where the consequences to the American economy and policy permit no alternative to firm judicial action enforcing our antitrust laws abroad. But before that step is taken, there should be a weighing of competing interests.

The antitrust statutes enacted by Congress commit this country to the free enterprise system and the exercise of open competition. If an American company is excluded from competition in a foreign country by fraudulent conduct on the part of another American company, then our national interests are adversely affected. In a purely domestic situation, the right to a remedy would be clear. When foreign nations are involved, however, it is unwise to ignore the fact that foreign policy, reciprocity, comity, and limitations of judicial power are considerations that should have a bearing on the decision to exercise or decline jurisdiction.6

Some decisions of American courts have been criticized for failure to adequately assess these concerns. In United States v. Imperial Chemical Industries, Ltd., 105 F.Supp. 215 (S.D.N.Y.1952), the court obtained personal jurisdiction over a British defendant, I.C.I., in an antitrust case. As part of the remedy, the court ordered I.C.I. to divest itself of certain patents which it had received from an American defendant, DuPont Company. However, I.C.I. was already under contract to grant exclusive licenses for these patents to another British company, British Nylon Spinners, Ltd., which was not before the American court. The contract being legal and enforceable in England, a court there prohibited I.C.I. from parting with the patents and required it to keep its agreement with British Nylon Spinners, Ltd. In the course of its opinion, the British court commented pointedly:

"Applied conversely, I conceive that the American courts would likewise be slow (to say the least) to recognise an assertion on the part of the British courts of jurisdiction extending, in effect, to the business affairs of persons and corporations in the United States." British Nylon Spinners, Ltd. v. Imperial Chemical Industries, Ltd., (1953) 1 Ch. 19, 24 (C.A.), Made permanent, (1955) 1 Ch. 37.

In other cases, orders by American courts directed to foreign countries to produce their records in this country have provoked protest and specific prohibitory legislation from those nations. See In re Grand Jury Subpoena Duces Tecum Addressed to the Canadian International Paper Co., 72 F.Supp. 1013 (S.D.N.Y.1947); Raymond, "Move with Circumspection Appropriate," supra; Cf. Societe Internationale v. Rogers, 357 U.S. 197, 78 S.Ct. 1087, 2 L.Ed.2d 1255 (1958); Ohio v. Arthur Andersen & Co., 570 F.2d 1370 (10th Cir.), Cert. denied, --- U.S. ----, 99 S.Ct. 114, 58 L.Ed.2d 129 (1978); Note, Foreign Nondisclosure Laws and Domestic Discovery Orders in Antitrust Litigation, 88 Yale L.J. 612 (1979).

The decision in Zenith Radio Corp. v. Hazeltine Research, Inc., supra, caused serious misgivings in Canada. See Comment, American Antitrust Laws and Canadian Patent Rights, 118 U.Pa.L.Rev. 983 (1970).

Some courts have exhibited a greater sensitivity to principles of international comity. For example, in United States v. General Electric Co., 82 F.Supp. 753 (D.N.J.1949), Opinion on remedies, 115 F.Supp. 835 (D.N.J.1953), then District Judge Forman inserted a savings clause in his order so as not to place the defendant in violation of laws in foreign countries where it carried on business. Cf. Vanity Fair Mills, Inc. v. T. Eaton Co., 234 F.2d 633 (2d Cir.), Cert. denied, 352 U.S. 871, 77 S.Ct. 96, 1 L.Ed.2d 76 (1956) (court interpreted Steele v. Bulova Watch Co., supra, as applying to conduct of its citizens in foreign countries when the rights of other nations or their nationals are not infringed).

In eschewing a provincial approach, these latter cases, in our view, best reflect the realities of international commerce. Courts should not shrink from their duty because of an inability by the affected parties to reach a consensus. Enough has been said, however, to demonstrate the appropriateness of a recent commentary made in another context: "Perhaps the one point that deserves to be stressed for the future is that the substantive antitrust analysis must not be applied mechanically where foreign contacts are involved not even in the so called per se area. More subtlety is required . . . ." I P. Areeda & D. Turner, Antitrust Law § 240 at 278 (1978).

In Timberlane Lumber Co. v. Bank of America, supra at 614-15, the Court of Appeals for the Ninth Circuit adopted a balancing process in determining whether extraterritorial jurisdiction should be exercised, an approach with which we find ourselves in substantial agreement. The factors we believe should be considered include:

1. Degree of conflict with foreign law or policy;

2. Nationality of the parties;

3. Relative importance of the alleged violation of conduct here compared to that abroad;

4. Availability of a remedy abroad and the pendency of litigation there;

5. Existence of intent to harm or affect Americ