Handgards, Inc., a Corporation v. Ethicon, Inc., a Corporation

Ethicon appeals from a judgment rendered after a civil jury trial in which it was found guilty of violating Section 2 of the Sherman Act by monopolizing or attempting to monopolize the market for heat-sealed plastic gloves sold to manufacturers of home hair care coloring kits. Plaintiff-appellee Handgards bases its private antitrust action upon its contention that Ethicon earlier had initiated and pursued a series of patent infringement suits against it in bad faith, or as an integral part of an overall scheme to monopolize. On appeal, Ethicon argues, Inter alia, that the district court erred in instructing the jury that Ethicon could be found guilty of an antitrust violation upon proof by a mere preponderance of the evidence that it had prosecuted one or more ill-founded patent infringement actions in bad faith and with an intent to monopolize. This court has jurisdiction pursuant to 28 U.S.C. § 1291. Because we conclude that the district court erred in so instructing the jury and because of certain deficiencies with respect to the court's charge regarding damages, we reverse the judgment entered below and remand the case for a new trial.

It is helpful to set forth a brief description of the patent enforcement conduct which forms the basis for Handgards' antitrust complaint before reviewing the history of the instant action.

A. The Prior Patent Enforcement Conduct.

The plaintiff-appellee Handgards, Inc. is a Nebraska corporation engaged in the business of manufacturing, distributing, and selling disposable plastic gloves adhered to paper. Handgards was formed from the 1966 merger of two constituent disposable plastic glove manufacturers: Plasticsmith, Inc. (Plasticsmith) and Mercury Manufacturing Company (Mercury). The defendant-appellant Ethicon, Inc. is a wholly-owned subsidiary of Johnson & Johnson and is engaged in the business of manufacturing, selling, and distributing surgical supplies. Prior to 1969, Ethicon manufactured, distributed, and sold disposable plastic gloves adhered to paper through its Arbrook division. Ethicon ended its participation in the disposable plastic glove business in 1969, when the assets of its Arbrook division were transferred to another Johnson & Johnson subsidiary named Arbrook, Inc.

In 1961 Ethicon acquired the assets of the Scott Company, which, for several years, had marketed disposable plastic gloves produced in accordance with a process developed by one of its founders, Joe Gerard. In so doing, Ethicon acquired both Gerard's pending application for a patent on his glovemaking process, as well as his glovemaking equipment.1 In 1961 Ethicon also acquired the pending patent application of one Rene Orsini.2 On April 3, 1962, the Gerard patent covering a glovemaking process issued to Ethicon. On October 20, 1964, the Orsini product patent covering a heat-sealed glove issued to Ethicon.

Both Plasticsmith and Mercury were engaged in the manufacture of heat-sealed disposable plastic gloves at the time the Gerard patent issued in 1962. After several months of unproductive negotiations concerning a licensing agreement for the Gerard patent between Ethicon and T. Hamil Reidy, the chief executive officer and controlling shareholder of Plasticsmith and Mercury, Ethicon filed patent infringement suits in October 1962 against both Plasticsmith and Mercury, alleging infringement of the Gerard patent.3 In December 1964, after the Orsini patent issued, Ethicon supplemented its patent infringement complaints against Plasticsmith and Mercury by adding a claim that the Orsini patent also was being infringed.

In 1966 Plasticsmith and Mercury were merged into a successor corporation, Handgards, Inc., the plaintiff in this case. Reidy continued as the chief executive officer and controlling shareholder in Handgards. In 1967, after learning that some of the allegedly infringing machines operated by Handgards reportedly were owned by Reidy rather than by Handgards or either of its predecessor corporations, Ethicon filed an infringement action against Reidy individually at his Chicago, Illinois residence. Reidy thereafter voluntarily intervened in the consolidated action then pending in California.

The consolidated patent infringement suit was tried to the court in 1968. Ethicon's trial counsel dropped the claims concerning the Orsini patent from the action, reportedly because he thought Orsini to be the weaker of the two patents and because he believed that narrowing the issues before the court would enhance the chance of successfully prosecuting the Gerard patent. On April 25, 1968, the trial judge entered judgment for Handgards, concluding that the Gerard patent was invalid because of the existence of a "prior public use" of the process by Lyle Shabram, one of the founders of Plasticsmith.4 On appeal, this court affirmed the district court in a brief per curiam decision.5

B. History of the Present Action.

Plaintiff-appellee Handgards filed this civil antitrust action in 1968 seeking to recover treble damages and other equitable relief for the injuries it claimed to its business and property by virtue of the alleged antitrust violations committed by defendant-appellant Ethicon and defendant Johnson & Johnson. The gist of the plaintiff's complaint was that the parent-subsidiary defendants had either unilaterally or in concert, monopolized, attempted to monopolize, and conspired to monopolize trade and commerce for the purpose of eliminating plaintiff as a competitor in the sale of disposable plastic gloves to the hair care and medical markets.

Plaintiff altered its primary theory of recovery dramatically during the eight year period between the time it commenced this action and the time of trial in 1976. Handgards' suit began primarily as a Walker Process case, i. e., a suit alleging antitrust liability for the enforcement of a fraudulently obtained patent (Orsini).6 See Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 86 S.Ct. 347, 15 L.Ed.2d 247 (1965). This theory ultimately proved not viable.7 In 1975 Handgards expressly abandoned the Walker Process theory at a hearing on a motion for summary judgment and instead asserted the two theories on which this case ultimately was tried: the first was referred to at trial as the "overall scheme" theory; the second was referred to as the "bad faith" theory. The district court's published opinion on the motion for summary judgment reflected the new orientation of plaintiff's case. Handgards, Inc. v. Johnson & Johnson, 413 F.Supp. 921 (N.D.Cal.1975).

(1) Handgards now largely bases its monopolization charge on the various patent infringement and other lawsuits brought on behalf of Ethicon by J & J house patent counsel. The claim is rooted in Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th Cir. 1952), Cert. denied, 344 U.S. 837, 73 S.Ct. 46, 97 L.Ed. 651 (1952), and its progeny particularly Mach-Tronics, Incorporated v. Zirpoli, 316 F.2d 820 (9th Cir. 1963), Rex Chainbelt, Inc. v. Harco Products, Inc., 512 F.2d 993 (9th Cir. 1975), and Prelin Industries, Inc. v. G & G Crafts, Inc., 357 F.Supp. 52 (W.D.Okl.1972). The Ethicon suits were purportedly brought as integral ingredients of a scheme to monopolize the disposable glove market. . . .

(2) Plaintiff charges that defendants attempted to create a monopoly in the disposable glove industry by accumulating a number of the relevant patents no matter how weak or narrow and then instigating a series of lawsuits in order to slowly litigate the competition out of business.

The bringing of a series of ill-founded patent infringement actions, in bad faith, can constitute an antitrust violation in and of itself If such suits are initiated or pursued with an intent to monopolize a particular industry (and, of course, the other elements of a Section 2 violation are present). Otter Tail Power Co. v. United States, 410 U.S. 366, 93 S.Ct. 1022, 35 L.Ed.2d 359 (1973); California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 92 S.Ct. 609, 30 L.Ed.2d 642 (1972); Kellogg Co. v. National Biscuit Co., 71 F.2d 662, 666 (2d Cir. 1934); Bolt Associates, Inc. v. Rix Industries, supra, (1973-1 Trade Cases, P 74,474 (N.D.Cal.1973)).

413 F.Supp. at 923-25 (emphasis in original).

The court defined the term "bad faith" in this context as knowing that the particular patent was invalid because (i) Ethicon allegedly knew (through its agent Gerard) of relevant prior art existing more than a year before the filing of the Gerard patent application; (ii) Ethicon allegedly knew (through its agent Gerard) that the invention had been on sale more than a year prior to the filing of the Gerard patent application; or (iii) Ethicon allegedly knew that the Orsini patent was invalid because material information had been withheld from the patent examiner.8 Id. at 925.

At the trial the parties presented dramatically different versions of the facts to the jury. Plaintiff contended that Ethicon had accumulated the Orsini and Gerard patents, two key patents in the field, intending to monopolize the industry; that Ethicon had initiated and pursued its patent infringement suits against Handgards and its predecessors in bad faith, i. e., with knowledge that the patents were invalid, for the purpose of monopolizing the market;9 that even if brought in good faith, Ethicon's infringement suits constituted individual predatory acts in an overall scheme to monopolize; and that Ethicon had generated adverse publicity regarding its infringement actions, threatening potential customers of the plaintiff, with the result that vital corporate resources were committed to defense of the infringement actions, Handgards' relations with potential customers were impaired, a proposed joint venture was aborted, and the company found itself unable to obtain outside financing necessary for it to remain competitive in the industry. Defendant Ethicon countered by arguing that it lacked any improper monopolistic motive in its acquisition of the Gerard and Orsini patents; that it had initiated the various infringement actions in complete good faith, after careful investigation, and with the reasonable expectation of success; that it did not publicize its infringement actions within the industry; and that Handgards' competitive problems resulted from its having marketed a lower quality product, provided poorer service, and been unwilling to respond to the competitive demands of the industry.

The jury returned a general verdict in favor of Handgards in the amount of $2,073,000 prior to trebling and gave the following responses to the special interrogatories submitted in the case: (1) the Orsini patent was not invalid on the basis of prior disclosures of another patent; (2) the relevant market in the case consisted of the market of heat-sealed plastic gloves sold to manufacturers of home hair care coloring kits; (3) Ethicon was guilty of monopolizing or attempting to monopolize the relevant market by prosecuting the patent lawsuits against Handgards and its predecessors in bad faith, that is, with actual knowledge that either the Gerard or the Orsini patent was invalid; (4) Ethicon was guilty of monopolizing or attempting to monopolize the relevant market by prosecuting the prior patent action as a predatory act in an overall scheme designed to exclude Handgards from the market; and (5) & (6) Ethicon and Johnson & Johnson were not guilty of entering into an agreement, combination, or conspiracy to restrain trade or to monopolize the relevant market.

Ethicon advances six basic arguments on appeal: (1) the trial court erred in instructing the jury that the bad faith enforcement of a patent can, without more, constitute an exclusionary act for which antitrust liability may result; (2) the finding that Ethicon prosecuted its infringement actions in bad faith is based upon pure speculation; (3) the jury's finding that Ethicon possessed a valid patent (Orsini) which covered the market found to have been monopolized precludes entry of a verdict of illegal monopolization of that market; (4) the trial court erred in permitting the jury to determine the relevant market and instead should have found that the relevant market was broader than the one chosen by the jury; (5) Handgards failed to show any injury resulting from the alleged section 2 violations by Ethicon; and (6) the trial court erred in directing a verdict against Ethicon on its antitrust counterclaim against Handgards. Because we conclude that resolution of appellant's contentions concerning the bad faith theory and the damages recoverable in a case of this sort necessitate reversal and remand for a new trial, we need not, at this time, reach the other issues urged by appellant. All such issues may be presented to the trial court for such reconsideration as it deems proper in the light of this opinion.

Antitrust Liability for Patent Enforcement Conduct.

A. The Problem.

We are confronted in this case with the complex interaction between two conflicting bodies of law: One, the patent law, is concerned with the creation and commercial exploitation of a statutory grant of monopoly power; the other, the antitrust law, is concerned with proscribing various kinds of monopoly power.10 Reconciling the interrelationship between the patent and antitrust laws has long been a topic of concern to courts as well as to commentators. See, e. g., Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 86 S.Ct. 347, 15 L.Ed.2d 247 (1965); Rex Chainbelt, Inc. v. Harco Products, Inc., 512 F.2d 993 (9th Cir.), Cert. denied, 423 U.S. 831, 96 S.Ct. 52, 46 L.Ed.2d 49 (1975); Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th Cir.), Cert. denied, 344 U.S. 837, 73 S.Ct. 46, 97 L.Ed.2d 651 (1952); P. Areeda & D. Turner, III Antitrust Law P 704a, at 114-15 (1978); L. Sullivan, Handbook of the Law of Antitrust § 181 (1977); and Stedman, Patents and Antitrust The Impact of Varying Legal Doctrines, 1973 Utah L.Rev. 588. This case presents yet another instance in which the boundaries of the patent-antitrust interface must be determined.

Patentees must be permitted to test the validity of their patents in court through actions against alleged infringers. Their status as alleged possessors of a legal monopoly does not cause them to be pariahs before the law. Eastern Railroad Presidents Conference v. Noerr Motor Freight, 365 U.S. 127, 81 S.Ct. 523, 5 L.Ed.2d 464 (1961) and United Mine Workers v. Pennington, 381 U.S. 657, 85 S.Ct. 1585, 14 L.Ed.2d 626 (1965) require no less.11 On the other hand, infringement actions initiated and conducted in bad faith contribute nothing to the furtherance of the policies of either the patent law or the antitrust law.12 The district court was correct in holding, in effect, that such actions may constitute an attempt to monopolize violative of Section 2 of the antitrust law.13 "Bad faith," however, is a subjective state of mind the existence of which, while not susceptible to certain proof, easily can spring from suggestive and weakly corroborative circumstances.

The problem, as we see it, is to provide the means whereby the bad faith infringement action can be identified post hoc with a sufficiently high degree of certainty to make it highly improbable that the action in fact was brought in good faith. The imposition of treble damages, a sanction strongly punitive, See Walker Process, supra, 382 U.S. at 180, 86 S.Ct. 347 (Harlan, J., concurring) and P. Areeda & D. Turner, Supra, II Antitrust Law PP 311, 331, dictates that such means exist. For reasons which appear below the solution of this problem points the way to the proper disposition of this case.B. The Solution.

Our search for a solution commences by distinguishing the facts of this case from those of the cases on which appellee Handgards primarily relies. First, this is not a Walker Process case. Walker Process stands for the proposition that "the enforcement of a patent procured by fraud on the Patent Office" may give rise to antitrust liability. See notes 6 & 7 Supra. Plaintiff Handgards does not contend that Ethicon sought to enforce a fraudulently-procured patent. Instead, Handgards asserts that Ethicon prosecuted infringement actions in bad faith, that is, with knowledge that the patents, though lawfully-obtained, were invalid.

Second, this is not a Kobe case. Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th Cir.), Cert. denied, 344 U.S. 837, 73 S.Ct. 46, 97 L.Ed.2d 651 (1952). In Kobe a patentee had engaged in a plan of monopolization by acquiring all present and future patents relevant to an industry, obtaining covenants not to compete from those from whom it purchased the patents, publicizing its infringement suits throughout the industry, and threatening suit against anyone trading with the alleged infringer. Kobe and its progeny, among which is Rex Chainbelt, supra, hold that a patentee may incur antitrust liability for even the good faith prosecution of a valid patent where it is shown that the infringement suit "was brought in furtherance and as an integral part of a plan to violate the antitrust laws." Rex Chainbelt, supra, 512 F.2d 1005-06.14 Our careful examination of the record in this case reveals that no evidence of any overall scheme to monopolize exists Apart from allegations that directly relate to the bad faith prosecution charges. The old wine in this case consists of evidence indicating that Ethicon may have brought the infringement actions in bad faith. It is the same old wine when put in a new bottle labelled "overall scheme."15

Finally, this is not an Otter Tail case. Otter Tail Power Co. v. United States, 410 U.S. 366, 93 S.Ct. 1022, 35 L.Ed.2d 359, On remand, 360 F.Supp. 451 (D.Minn.1973), Aff'd mem., 417 U.S. 901, 94 S.Ct. 2594, 41 L.Ed.2d 207 (1974). Handgards has neither pleaded nor proved that Ethicon engaged in a pattern of baseless, repetitive litigation designed to prevent meaningful access to an adjudicatory tribunal. See generally Franchise Realty Interstate Corp. v. San Francisco Local Joint Executive Board of Culinary Workers, 542 F.2d 1076, 1081 n.4, 1087 (9th Cir. 1976), Cert. denied, 430 U.S. 940, 97 S.Ct. 1571, 51 L.Ed.2d 787 (1977).16

Rather, this case involves simply the commencement and maintenance of related infringement actions in what the jury found to be bad faith.

A clash between the policies of patent and antitrust laws also was present in Walker Process and Kobe. In the former the compromise consisted of erecting high barriers to success by the antitrust plaintiff. As we noted in Cataphote Corp. v. DeSoto Chemical Coatings, Inc., 450 F.2d 769 (9th Cir. 1971), Cert. denied, 408 U.S. 929, 92 S.Ct. 2497, 33 L.Ed.2d 341 (1972):

The patent fraud proscribed by Walker is extremely circumscribed. In Walker the Supreme Court excluded from its definition of fraud "an honest mistake as to the effect of prior installation upon patentability so-called 'technical fraud.' " Walker, supra, (382 U.S.) at 177, 86 S.Ct. 347, 350 (15 L.Ed.2d 247). Wholly inadvertent errors or honest mistakes which are caused by neither fraudulent intent or design, nor by the patentee's gross negligence, do not constitute fraud under Walker. . . . The road to the Patent Office is so tortuous and patent litigation is usually so complex, that "knowing and willful fraud" as the term is used in Walker can mean no less than Clear, convincing proof of intentional fraud involving affirmative dishonesty, "a deliberately planned and carefully executed scheme to defraud * * * the Patent Office." . . . Patent fraud cases prior to Walker required a rigorous standard of deceit. . . . Walker requires no less.

450 F.2d at 772 (emphasis added) (footnote and citations omitted). See SSP Agricultural Equipment, Inc. v. Orchard-Rite Ltd., 592 F.2d 1096 at 1103 (9th Cir. 1979).

In overall scheme cases such as Kobe, courts require proof of an overall scheme to monopolize independent of the mere commencement of an infringement suit before permitting the imposition of antitrust liability based on patent enforcement conduct. This requirement diminishes the specter of antitrust liability encountered by an ordinary patentee who brings an infringement action. See Hibner, Litigation as an Overt Act Development and Prognosis, 46 Antitrust L.J. 718, 720 (1977).

The common thread is that in both Walker Process and Kobe barriers were erected to prevent frustration of patent law by the long reach of antitrust law. This suggests our proper course. It is to erect such barriers to antitrust suits as are necessary to provide reasonable protection for the honest patentee who brings an infringement action to protect his legal monopoly.

A proper barrier is, in our opinion, suggested by Walker Process. It is that the jury should be instructed that a patentee's infringement suit is presumptively in good faith and that this presumption can be rebutted only by clear and convincing evidence. See Cataphote Corp., supra, 450 F.2d at 772; SSP Agricultural Equipment, supra. Such an instruction accords the patentee a presumption commensurate with the statutory presumption of patent validity set forth in the patent laws, 35 U.S.C. P 282, which can only be rebutted by a showing of clear and convincing evidence. See, e. g., Santa Fe-Pomeroy, Inc. v. P & Z Co., 569 F.2d 1084, 1091 (9th Cir. 1978); Saf-Gard Products, Inc. v. Service Parts, Inc., 532 F.2d 1266, 1271 (9th Cir.), Cert. denied, 429 U.S. 896, 97 S.Ct. 258, 50 L.Ed.2d 179 (1976).

The trial court in this case, however, gave no such instruction. See note 15 Supra. Moreover, it charged that the patentee's subjective bad faith need only be proved by a mere preponderance of the evidence. This constitutes reversible error. The district court charge eliminates a barrier we hold necessary, and were it accepted as proper, "might well chill" legitimate patent enforcement efforts "because of fear of the vexations or punitive consequences of treble-damage suits." Walker Process, supra, 382 U.S. at 180, 86 S.Ct. at 352 (Harlan, J., concurring).

The barrier we impose is not one intended to be utilized in antitrust litigation generally. It is fashioned in response to the unique characteristics of proceedings in which the alleged violation of the antitrust law consists solely of one or more infringement actions initiated in bad faith.

Damages Recoverable By Victims of Bad Faith Infringement Actions.

Difficulty also exists with respect to the trial court's charge to the jury concerning the nature of the injuries for which plaintiff properly may recover damages in an antitrust suit based upon a bad faith prosecution theory. "The Supreme Court has recently ruled that the only damages recoverable in an antitrust suit are those which occur by reason of that which made the defendant's actions unlawful." Kapp v. National Football League,586 F.2d 644, 648 (9th Cir. 1978) (citing Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489, 97 S.Ct. 690, 50 L.Ed.2d 701 (1977)). Brunswick states the applicable rule and is the governing authority:

. . . (For) plaintiffs to recover treble damages . . . they must prove more than injury causally linked to . . . (the antitrust violation). Plaintiffs must prove Antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendant's acts unlawful. The injury should reflect the anticompetitive effect either of the violation or of anticompetitive acts made possible by the violation. It should, in short, be "the type of loss that the claimed violations . . . would be likely to cause." Zenith Radio Corp. v. Hazeltine Research, 395 U.S. (100) at 125 (89 S.Ct. 1562 at 1577, 23 L.Ed.2d 129).

429 U.S. at 489, 97 S.Ct. at 697-698 (emphasis in original) (footnote omitted).

Plaintiff must show that the injury for which it seeks to recover is "the type the antitrust laws were intended to prevent" and "flows from that which makes defendant's acts unlawful." In a suit alleging antitrust injury based upon a bad faith prosecution theory it is obvious that the costs incurred in defense of the prior patent infringement suit are an injury which "flows" from the antitrust wrong. Damages for the loss of profits, however, will not necessarily so flow. We have some doubt, for example, whether plaintiff's damage claim for lost profits allegedly resulting from the entry of an additional competitor into the market during the pendency of the infringement suit is the type of injury for which antitrust recovery is appropriate. "The antitrust laws . . . were enacted for 'the protection of Competition, not Competitors.' " Brunswick, supra, 429 U.S. at 488, 97 S.Ct. at 697 (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 320, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962)). Moreover, the jury's finding in this case that Ethicon possessed a valid patent covering the market it was accused of monopolizing also raises doubts concerning whether plaintiff's lost profits "flowed from" the antitrust wrong claimed in this case.

The court's charge concerning the damages available to plaintiff for lost profits is ambiguous. Several times the court stated that plaintiff could only recover for lost profits that it would have earned "but for" the antitrust violation by the defendant. See Reporter's Transcript at 2160, 2162. The court also stated however, that plaintiff could recover as damages profits lost as the "proximate result" of the antitrust violation. Id. at 2163. The court earlier had defined the term "proximate cause" to mean "an act . . . (that) played a substantial part in bringing about" the injury. Id. at 2161. According to Brunswick, plaintiff must show more than that it suffered injury causally linked to the antitrust violation; the injury must be shown to have "flowed" from the wrong. To "flow" from the wrong, Brunswick suggests, the loss must be " 'the type of loss that the claimed violations . . . would be likely to cause.' " 429 U.S. at 489, 97 S.Ct. at 697, quoting from Zenith Radio Corp. v. Hazeltine Research, 395 U.S. 100, 125, 89 S.Ct. 1562, 23 L.Ed.2d 129 (1969). To be one of several causes is not enough. The injury must be of the type likely to be caused by the defendant's bad faith infringement action. On the record before us we are left in doubt whether the Brunswick test has been met with respect to plaintiff's claim for lost profits. The failure of the trial court to resolve this doubt specifically constitutes error.

The Reasonable Balance.

The additional burdens imposed by our holdings on those who seek an antitrust recovery against one who has brought a patent infringement action against them achieve what we believe to be a reasonable accommodation of the policies