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*38
Petitioner and its subsidiaries engaged in the manufacture, marketing, and sale of soft contact lenses and related products in the United States and abroad. B&L Ireland was organized on Feb. 1, 1980, under the laws of the Republic of Ireland as a third tier, wholly owned subsidiary of petitioner. B&L Ireland was organized for valid business reasons and to take advantage of certain tax and other incentives offered by the Republic of Ireland. Pursuant to an agreement dated Jan. 1, 1981, petitioner granted to B&L Ireland a nonexclusive license to use its patented and unpatented manufacturing technology to manufacture soft contact lenses in Ireland and a nonexclusive license to use certain of its trademarks in the sale of soft contact lenses produced through use of the licensed technology worldwide. In return, B&L Ireland agreed to pay petitioner a royalty equal to 5 percent of sales. In 1981 and 1982, B&L Ireland engaged in the manufacture and sale of soft contact lenses in the Republic of Ireland. All of B&L Ireland's sales were made either to petitioner or certain of petitioner's wholly owned foreign sales affiliates at a price of *39 $ 7.50 per lens.
| CONTENTS | |
| Page | |
| I. Introductory Information | 529 |
| A. Petitioners | 529 |
| B. Bausch & Lomb Ireland, Ltd | 529 |
| C. The Business of B&L and its Subsidiaries | 530 |
| II. Historical Development of the Soft Contact Lens Industry | |
| Through 1982 | 532 |
| A. History of the Contact Lens Industry Prior to the | |
| Development of the Soft Contact Lens | 532 |
| B. Development of the Soft Contact Lens and the Spin Cast | |
| Manufacturing Process | 533 |
| 1. Discovery and Development of the Soft Contact Lens | |
| and the Spin Cast Manufacturing Process | 533 |
| 2. Relevant United States and Foreign Patents Obtained | |
| by Dr. Wichterle and Associates | 535 |
| a. Materials Patents | 535 |
| b. Spin Cast Patents | 535 |
| c. Other Process Patents | 536 |
| C. License Agreements Between Czechoslovak Academy of | |
| Science and National Patent Development Corp. and | |
| Related Entities | 536 |
| D. Sublicense Agreements Between NPDC and B&L and | |
| Certain Related Litigation | 539 |
| 1. Sublicense Agreements Between NPDC and B&L | 539 |
| 2. Litigation with Respect to the Wichterle Patents in | |
| Europe | 540 |
| 3. Litigation Relating to Soft Contact Lens Technology | 541 |
| 4. Settlement of Litigation Between NPDC and B&L and | |
| the 1977 Sublicenses | 543 |
| E. B&L's Operations and Activities With Respect to Soft | |
| Contact Lenses and Spin Cast Technology from 1966 | |
| Through 1971 | 544 |
| 1. B&L's Development of the Soft Contact Lens and Spin | |
| Cast Process | 544 |
| 2. FDA Activities | 546 |
| F. Development of the Soft Contact Lens Market in the | |
| United States From 1971 through 1982 | 547 |
| G. Development of New Soft Contact Lens Products | 548 |
| 1. Thin Soft Contact Lenses | 548 |
| 2. Toric Soft Contact Lenses | 549 |
| 3. Extended Wear Soft Contact Lenses | 549 |
| 4. Rigid Gas Permeable Contact Lenses | 549 |
| H. Development of Manufacturing Technologies | 550 |
| 1. The Spin Cast Process | 550 |
| 2. Semiautomatic and Automatic Lathing Process | 550 |
| 3. The Cast Molding Process | 551 |
| 4. The Vertical Spin Cast Process | 553 |
| I. Research and Development Activities of B&L's Soflens | |
| Division | 554 |
| J. Sales and Marketing Activities of B&L's Soflens Division | 555 |
| K. Development of the International Soft Contact Lens Market | 556 |
| III. Historical Development of the Irish Operations of B&L | |
| Ireland | 557 |
| A. Background of Decision to Establish Foreign Manufacturing | |
| Facility | 557 |
| B. Investigation of and Decision to Establish an Overseas | |
| Manufacturing Facility | 559 |
| C. Negotiations and Agreement Among Petitioners, B&L | |
| Ireland, and the Industrial Development Authority of | |
| the Republic of Ireland | 560 |
| D. Manufacturing Intangibles Related to Spin Casting and | |
| Soft Contact Lens Products | 563 |
| 1. Technology in the Public Domain | 563 |
| 2. B&L License of Trade Secrets to B&L Ireland | 563 |
| E. Financing of the Irish Operation | 564 |
| 1. Section 84 Financing | 564 |
| 2. Lease Financing Arrangements | 564 |
| F. Establishment of Manufacturing Operations by B&L Ireland | 565 |
| IV. Operations of B&L Ireland in 1981 and 1982 | 566 |
| A. Production Planning and Scheduling | 566 |
| B. Purchases of Raw Materials and Materials Policies | 567 |
| C. B&L Ireland's Manufacture of Soft Contact Lenses Using | |
| the Spin Cast Manufacturing Process | 567 |
| 1. The Dry Process | 568 |
| 2. The Hydration Process | 569 |
| 3. The Lens Inspection and Packaging Processes | 569 |
| 4. Quality Assurance Procedures | 570 |
| D. B&L Ireland's Engineering Functions | 571 |
| E. B&L Ireland's Sales of Soft Contact Lenses | 573 |
| F. Pricing Policy With Respect to Intercompany Sales After | |
| Establishment of B&L Ireland | 574 |
| G. Royalties Paid by B&L Ireland to B&L in 1981 and 1982 | 574 |
| V. Sales of Soft Contact Lenses by Other Manufacturers During | |
| 1981 and 1982 | 574 |
| A. American Sterilizer Co. (Lombart) | 575 |
| B. National Patent Development Corp. (American Hydron) | 575 |
| 1. Sales Under Trademarks of NPDC and its Affiliates | 577 |
| 2. Private Label Sales by NPDC and its Affiliates | 578 |
| C. American Optical Corp | 578 |
| D. Hydrocurve (Soft Lenses, Inc.) | 579 |
| E. Other Manufacturers | 580 |
| VI. Respondent's Proposed Adjustments | 580 |
| Opinion Introduction | |
| A. Determination of Arm's-Length Prices Between Petitioner | |
| and B&L Ireland for Soft Contact Lenses | 584 |
| B. Determination of Arm's-Length Royalty Payable by B&L | |
| Ireland for use of B&L's Intangibles | 594 |
*528 Respondent determined deficiencies in petitioners' consolidated corporate Federal income tax in the amounts and for the years as follows:
| TYE | Deficiency |
| Dec. 30, 1979 | $ 5,797,857 |
| Dec. 28, 1980 | 514,141 |
| Dec. 27, 1981 | 2,714,394 |
The determination of petitioners' 1979, 1980, and 1981 United States consolidated taxable income requires a determination as to petitioners' United States consolidated taxable income for the year 1982 due to net operating loss and foreign tax credit carrybacks.
Among other adjustments made by respondent in his statutory notice, respondent determined that income should be reallocated in the amounts of $ 2,778,000 and $ 19,793,750 for the years 1981 and 1982, respectively, from Bausch & Lomb Ireland, Ltd. to Bausch & Lomb Inc. pursuant to
After concessions, the issues for determination are: (1) Whether respondent's allocations of gross income from Bausch & Lomb Ireland, Ltd., to Bausch & Lomb Inc. were arbitrary, capricious, or unreasonable; and (2) whether an allocation under
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulations and exhibits attached thereto are incorporated herein by this reference.
I. Introductory information
A.
Petitioner Bausch & Lomb Inc. is a New York corporation with principal corporate offices at Rochester, New York, at the time its*42 petition herein was filed. Unless otherwise indicated, as used herein, the term "B&L" shall refer to Bausch & Lomb Inc., as a separate and legal entity. B&L is the parent company of a group of corporations which filed consolidated Federal income tax returns for its tax years ending in 1979, 1980, 1981, and 1982. Unless otherwise indicated, as used herein, the term "petitioners" shall include B&L, as well as its subsidiaries which were included in the above-described consolidated Federal income tax returns. The term "B&L and its subsidiaries" shall refer to B&L and those of its subsidiaries and affiliates which are consolidated for financial reporting purposes, including foreign subsidiaries.
During the years 1979, 1980, 1981, and 1982, petitioners kept their books and records and filed their Federal income tax returns on the basis of an accrual method of accounting, and on the basis of a 52-53 week taxable year.
B.
Bausch & Lomb Ireland, Ltd. (B&L Ireland), is a corporation organized and existing under the laws of the Republic of Ireland, with its principal place of business at Waterford, *530 Ireland, during each of the taxable years at *43 issue herein. B&L Ireland was incorporated on February 1, 1980. During the years 1980, 1981, and 1982, B&L Ireland maintained its books and records on the accrual method of accounting, and on the basis of a 52-53 week taxable year.
During each of the taxable years at issue herein, B&L Ireland was a wholly owned subsidiary of Bausch & Lomb Waterford, Ltd. (B&L Waterford). B&L Waterford was incorporated under the laws of the Republic of Ireland on February 1, 1980, as a wholly owned subsidiary of Applied Research Laboratories S.A. (Switzerland) (ARL). ARL was incorporated under the laws of Switzerland on August 19, 1967, and was a wholly owned subsidiary of B&L during each of the taxable years at issue herein.
B&L Ireland was organized by B&L for valid business reasons and to take advantage of tax benefits and other inducements offered by the Republic of Ireland to companies establishing manufacturing facilities within the Republic.
B&L is the outgrowth of a partnership established by J.J. Bausch and Henry Lomb in the 1850's in Rochester, New York. The business operated as a partnership until March 20, 1908, when B&L was incorporated. *44 Since inception, B&L had been involved in the manufacture and sale of a wide variety of scientific and ophthalmic instruments and products.
B&L first entered the contact lens business on a national level in May 1971, when B&L began to manufacture and sell "soft" contact lenses throughout the United States on a commercial basis. B&L produced soft contact lenses at its Rochester facility using both the "spin cast" and "lathing" manufacturing processes. During late 1971 and throughout 1972, B&L and its subsidiaries began to market soft contact lenses in various foreign countries in the Western Hemisphere, Europe, and the Pacific Basin region.
In 1971, B&L established the Soflens Division to conduct its soft contact lens business. Prior to January 1, 1982, petitioners' business with respect to soft contact lenses and products related to soft contact lenses, such as accessories, *531 solutions, and other related products were managed by the Soflens Division. On January 1, 1982, the Soflens Division was split into two divisions, the Soflens Professional Products Division which subsequently managed petitioners' soft contact lens business; and the Personal Products Division which*45 subsequently managed petitioners' business with respect to accessories, solutions, and other products related to soft contact lenses.
Within the vision care segment of petitioners' business in 1979 and 1980 there were three product areas, (i) contact lens products, consisting of soft contact lenses, accessories, solutions, and insurance, (ii) consumer products, consisting of sunglasses, binoculars, telescopes, and riflescopes, and (iii) ophthalmic products, consisting of eyeglass frames and lenses, and prescription services. In November 1981, B&L discontinued its ophthalmic business, and began to sell all of the assets of such business. Thus, after November 1981 and throughout 1982, the vision care segment of petitioners' business included only contact lens products and consumer products.
During the years 1979 through 1982, B&L and approximately 23 of its foreign subsidiaries sold soft contact lenses in approximately 64 countries.
During the years 1981 and 1982, B&L Ireland was engaged in the manufacture and sale of soft contact lenses which were manufactured at its manufacturing facility in Waterford, Ireland, using the spin cast process.
At the end of 1980, 1981, and 1982, B&L*46 and its worldwide subsidiaries employed approximately 11,800, 10,200, and 7,700 individuals, respectively. The reduction in 1982 in the number of employees of B&L and its subsidiaries was attributable largely to the discontinuation and disposition of B&L's ophthalmic business.
The (i) worldwide consolidated net sales and (ii) the worldwide consolidated contact lens and related products net sales (including solutions, accessories, and other products related to contact lenses) of B&L and its subsidiaries for the years 1979 through 1982 were as follows (000s omitted): *532
| Worldwide consolidated contact | ||
| Worldwide consolidated | lenses and related products | |
| Year | net sales | net sales |
| 1979 | $ 503,031 | $ 139,740 |
| 1980 | 582,681 | 176,403 |
| 1981 | 533,300 | 201,600 |
| 1982 | 509,736 | 205,600 |
II. Historical development of the soft contact lens industry through 1982
A.
In 1938, a new material known as polymethyl methacrylate (PMMA) was developed. PMMA is a hard, plastic material which is easily shaped into thin dimensions. PMMA's relative safety, lightness, and workability *47 made it a suitable material from which to fashion contact lenses. The first contact lenses had been developed in the late nineteenth century. These contact lenses were made of glass and were extremely uncomfortable. Thus, glass lenses had never gained general acceptance. By 1951, a United States patent with respect to a PMMA contact lens had been issued.
Throughout the 1950's and 1960's, virtually all contact lenses manufactured and sold in the United States and throughout the world were hard (as opposed to "soft"), plastic contact lenses made of PMMA. Although PMMA lenses were a significant improvement over lenses made of glass, PMMA lenses are hard, nonpermeable by air, and do not absorb water. Therefore, such lenses can cause significant discomfort to users if worn for an extended period of time.
Through the early 1970's, PMMA hard lenses were produced by hundreds of small, independent laboratories, which served local ophthalmologists, optometrists, and opticians (the "3-0s" or "optical practitioners" or "practitioners") on a custom order basis. These laboratories generally had only a few employees and produced PMMA lenses utilizing a manual lathing process. To produce a*48 contact lens using the manual lathing method, a manufacturer first produces or purchases a plastic lens "button," which consists of a thin, circular piece of raw plastic. The plastic lens button is *533 placed on a lathe machine. The machine operator manually guides a cutting device which cuts away excess material on one side of the button to form the base curve of the contact lens. The lens button is then removed from the lathe machine, turned over, and the process is repeated to form the front curve of the contact lens. The lens is then edged, polished, inspected, checked for power, and packaged for storage or shipment.
There are few variations in the manual lathing method, which is labor rather than capital intensive. The critical aspect of contact lens manufacturing using the lathing method is the quality control and attention to detail necessary to perform each and every step accurately so that the final product conforms to the specifications of the manufacturer and performs as expected by the practitioner.
B. 1. Discovery and Development of the Soft Contact Lens and the Spin Cast*49 Manufacturing Process
During the late 1940's and early 1950's, Dr. Otto Wichterle and Dr. Drahoslav Lim, Czechoslovakian chemists associated with the Czechslovakian Academy of Science (CAS), began working to formulate new hydrophilic (water absorbing) materials. By 1954, Dr. Wichterle and his associates had developed a hydrophilic gel (hydrogel) that was synthesized by copolymerization of 2-hydroxyethyl methacrylate (HEMA) with ethylene dimethacrylate, a basic liquid HEMA monomer. A monomer is a chemical compound which is capable of undergoing polymerization. Such hydrophilic material in its hardened or "polymerized" state is commonly referred to as a "polymer."
In 1955 and 1956, Dr. Wichterle and his associates incorporated the basic HEMA monomer into a contact lens for the first time. A contact lens that is manufactured using a HEMA-based material is referred to herein as a "HEMA lens," a "soft HEMA lens," or a "soft contact lens."
HEMA lenses, unlike contact lenses made of PMMA, can absorb water and as a result become soft and flexible, permitting many individuals to wear contact lenses without significant discomfort. "Soft" contact lenses are also generally *534 more*50 comfortable to wear due to differences in thickness, weight, and diameter.
Various clinical tests performed in Prague established that contact lenses produced from the HEMA material could be worn successfully by human patients.
The first lenses produced by Dr. Wichterle were formed by polymerizing the HEMA compound in a crude, stationary mold. In late 1961, Dr. Wichterle first manufactured soft contact lenses using a spinning open mold mounted on a crude spin cast machine which Dr. Wichterle had fabricated in the kitchen of his home. The spin cast process uses centrifugal force to produce a contact lens. The shape and power of a soft contact lens manufactured using the spin cast process is determined by the shape and size of the mold, the quantity and density of the monomer mixture injected into the mold, and the speed of the rotation of the spindle that holds the mold. Dr. Wichterle and his associates continued to produce soft contact lenses using the "spin cast method" during 1962 through 1965. They continued to improve upon the original spin cast process of producing soft contact lenses throughout this period.
In 1963, Dr. Wichterle developed a process by which the gel from*51 which the soft HEMA contact lenses were made was transformed into a hard state, and the material was lathed, machined, ground, and polished in a fashion similar to the PMMA used to make hard contact lenses. Such material was referred to as "Xerogel."
During or prior to 1966, Dr. Wichterle and his associates prepared a three volume text entitled "Soflens Production Line Documentation." This text details the steps necessary in the manufacture of the HEMA monomer mixture used in the manufacture of a soft contact lens, as well as the procedure for manufacturing the soft contact lens itself using the spin cast process.
During the late 1970's and early 1980's, the soft HEMA lens became the predominant type of contact lens sold in the United States. Prior to 1971, the hard (PMMA) contact lens was the only contact lens available in the United States. The percentage of sales of contact lens which were soft (HEMA) contact lenses and hard (PMMA) contact lenses in the United States for the years 1978 through 1982 were *535 approximately as follows:
| Year | PMMA | HEMA | Other |
| 1978 | 51% | 49% | |
| 1979 | 39 | 54 | 6 |
| 1980 | 27 | 64 | 8 |
| 1981 | 21 | 70 | 9 |
| 1982 | 15 | 75 | 10 |
2. Relevant United States*52 and Foreign Patents Obtained by Dr. Wichterle and Associates
a. Materials Patents
On March 28, 1961, the U.S. Patent Office (Patent Office), issued to Dr. Wichterle and Dr. Lim, a patent with respect to a "process for producing shaped articles from three-dimensional hydrophilic high polymers" (Material Patent I). The 17-year term of Material Patent I expired on March 28, 1978.
On November 30, 1965, the Patent Office, issued to Dr. Wichterle and Dr. Lim a patent with respect to "cross-linked hydrophilic polymers and articles made therefrom (Material Patent II). The 17-year term of Material Patent II expired on November 30, 1982. On June 20, 1972, the Patent Office issued to Dr. Wichterle and Dr. Lim a reissued patent which was a reissue of Material Patent II.
b. Spin Cast Patents
On October 29, 1968, the Patent Office issued to Dr. Wichterle and CAS a patent with respect to a "method for centrifugal casting a contact lens" (Spin Cast Patent I). The 17-year term of Spin Cast Patent I expired on October 29, 1985.
On May 2, 1972, the Patent Office issued to Dr. Wichterle and CAS a patent with respect to a "method of centrifugally casting thin edged corneal contact lenses" essentially*53 consisting of soft hydrogels of organic polymers (Spin Cast Patent II). Dr. Wichterle and CAS disclaimed the portion of the 17-year term of Spin Cast Patent II which extended beyond October 29, 1985.
On February 17, 1970, the Patent Office issued to Dr. Wichterle and CAS a patent with respect to a "method of manufacturing soft and flexible contact lenses" (Xerogel Spin Cast Patent). Dr. Wichterle and CAS disclaimed the *536 portion of the 17-year term of Xerogel Spin Cast Patent which extended beyond January 2, 1985.
c. Other Process Patents
On January 2, 1968, the Patent Office issued to Dr. Wichterle and CAS a patent with respect to "reshaping a xerogel by mechanical removal and swelling to form a hydrogel contact lens" (lathing patent). The term of the lathing patent expired on January 2, 1985.
On July 2, 1974, the Patent Office issued to Dr. Wichterle and CAS a patent with respect to a "contact lens blank or replica made from anhydrous, sparingly cross-linked hydrophilic copolymers" (replica patent). The term of the Replica Patent will expire on July 2, 1989.
Material Patent I and Material Patent II are referred to collectively herein as the "material patents." The material*54 patents, Spin Cast Patent I, and Spin Cast Patent II, the Xerogel Spin Cast Patent, the lathing Patent, and the replica Patent, and all United States and foreign patents related thereto as the context requires, are referred to collectively herein as the "Wichterle Patents."
In addition, Dr. Wichterle and CAS filed patent applications and obtained patents in numerous foreign countries with respect to the technology and inventions covered by the Wichterle patents. However, neither Dr. Wichterle nor CAS obtained any patents in the Republic of Ireland with respect to the soft contact lens, the spin cast process, or any other technology embodied in the Wichterle patents. Nor did any representative or agent of CAS or Dr. Wichterle obtain or attempt to obtain at any time approval from the FDA to market a soft HEMA lens in the United States.
During and prior to the years at issue, National Patent Development Corp. (NPDC) was a publicly owned firm that was unrelated to B&L or its subsidiaries.
On or about March 12, 1965, CAS, represented by Polytechna, a Czechoslovakian*55 firm, and Flexible Contact Lens Corp., represented by National Patent Development Corp., entered into a license agreement pursuant to which *537 CAS granted to Flexible an exclusive license (CAS License Agreement) to manufacture and sell the soft HEMA contact lens developed by Dr. Wichterle (Wichterle lens) in the Western Hemisphere. 2*57 CAS also agreed to provide Flexible with 25,000 first class quality sample Wichterle lenses. The license agreement was for an initial term of no less than 10 years with annual renewals at the option of the parties thereafter. Pursuant to this agreement, Flexible was obligated to pay to CAS an initial fee of $ 75,000 and a royalty of $ 2.50 per lens sold during the 1st year of the agreement. During the 2nd through 6th years of the agreement, Flexible agreed to pay CAS a royalty of $ 2 per lens for the first 100,000 lenses sold each year; a royalty of $ 1.50 per lens for the next 150,000 lenses sold; and a royalty of $ 1 per lens for every lens in excess of 250,000 sold each year. After the 6th year of the agreement, the royalty would be $ 1 per lens sold. The agreement also provided that the royalty payable in the 2nd through 6th years of*56 the agreement be no less than $ 100,000 per year. On or about May 6, 1965, the parties adopted two amendments to this agreement one of which extended the territory covered by the agreement to include South Africa in exchange for an addition of $ 5,000 to the initial $ 75,000 fee described above. The exclusive license granted by CAS to Flexible pursuant to the CAS License Agreement covered the Wichterle Patents, all related patents subsequently issued in the United States or other countries in North America, South America, and Central America, and any other know-how, formulas, or technical information which related to the technology or inventions covered by the Wichterle Patents and all related patents. 3 A sublicense of the CAS License Agreement was subsequently granted to NPDC by Flexible.
*538 On or about May 25, 1966, NPDC and CAS, represented by Polytechna, entered into a license agreement pursuant to which CAS granted to NPDC a 15-year exclusive license to manufacture and sell the Wichterle lens in Israel. In consideration for the exclusive license, NPDC agreed to pay CAS an initial fee of $ 1,750 and a royalty of $ 2 for each Wichterle lens sold by NPDC in Israel.
On or about May 20, 1968, the parties to the CAS License Agreement adopted an amendment to the agreement to modify the royalty provisions contained therein (1968 Amendment). Pursuant to the 1968 Amendment, in 1969 NPDC was required to pay royalties to CAS in the amount of 6 percent of the net selling price of each soft contact lens sold in the United States and Canada with a reduction in the rate to 5 percent of the net selling price after the*58 minimum royalty was reached (not to be less than $ 1 per lens). 4 Additionally, NPDC was required to pay CAS a royalty in the amount of 5 percent of the net selling price of each soft contact lens sold in countries under the agreement other than the United States and Canada. "Net selling price" was defined as the net proceeds per Wichterle lens sold to the first independent buyer that was not a subsidiary or affiliate of NPDC the licensor. Unless otherwise indicated, this definition of net selling price or "net sales" applies to all subsequently discussed licensing agreements.
On June 26, 1967, CAS and NPDC entered into a license agreement pursuant to which CAS granted to NPDC an exclusive license to manufacture and sell the Wichterle lens in six specified countries in the Far East (Far East License Agreement). Pursuant to such agreement, NPDC was required to pay to CAS*59 an initial fee of $ 35,000 and royalties in the amount of 5 percent of net sales in the specified territories. A sublicense was subsequently granted to Hydron International by NPDC.
On or about October 16, 1970, CAS and Hydron Europe entered into an agreement pursuant to which CAS granted to Hydron Europe an exclusive license for a minimum term of 15 years to manufacture, use, and sell the Wichterle soft contact lens throughout Europe (European License Agreement). *539 Pursuant to such agreement, Hydron Europe was required to pay to CAS an initial fee of $ 25,000 and royalties in the amount of 5 percent of net sales in the specified territories. The agreement also contained provision for minimum royalties of between $ 25,000 and $ 50,000 per year.
On February 15, 1972, Hydron Europe, Optics Bermuda, Ltd., NPDC, and Smith & Nephew Associated Cos. Ltd., entered into a license agreement pursuant to which Hydron Europe granted to Optics an exclusive license to manufacture, use, and sell the Wichterle lens in the United Kingdom and in certain specified European countries. After a period of 2 1/2 years the license became nonexclusive. Pursuant to such agreement, Optics was required*60 to pay to CAS on behalf of Hydron Europe royalties in the amount of 5 percent of net sales in the specified territories.
D.
1. Sublicense Agreements Between NPDC and B&L
On or about October 6, 1966, NPDC and B&L entered into an agreement pursuant to which NPDC granted to B&L, inter alia, an exclusive sublicense to manufacture, use, sell, and distribute the Wichterle lens in the Western Hemisphere and to use the Wichterle patents and any related patents then or subsequently issued to CAS in such territories and all of the related technical know-how which CAS licensed to Flexible, and which Flexible licensed to NPDC (NPDC Sublicense Agreement). NPDC also agreed to endeavor to acquire monomer mixture for B&L under certain terms and conditions. On or about August 16, 1971, the parties to the NPDC Sublicense Agreement and Flexible adopted an amendment to the NPDC sublicense agreement, which, inter alia, extended the exclusive sublicense to include Israel and South Africa.
Pursuant to the NPDC Sublicense Agreement, B&L agreed to pay to NPDC a royalty with respect to domestic sales in an amount equal to 50 *61 percent of the difference between (a) B&L's sales of soft contact lenses in the United States and (b) the sum of (i) 35 percent of such sales, (ii) all direct and indirect expenditures incurred by B&L in connection with *540 the development, engineering, and manufacture of the soft contact lens, the spin cast machine, and related products, (iii) all other direct costs and expenses incurred by B&L in connection with soft contact lenses sold in the United States, (iv) all amounts paid to CAS, and (v) all previously unrecouped amounts referred to above. With respect to foreign sales, B&L agreed to pay to NPDC a royalty in an amount equal to (i) 10 percent of its sales to purchasers outside the United States plus (ii) $ 1 per each lens sold to purchasers outside the United States. B&L also agreed to purchase from NPDC the two automatic spin cast lens manufacturing machines which NPDC had agreed to purchase from KOVO on the same terms that NPDC had agreed to.
On August 16, 1971, NPDC, Hydron Pacific, and B&L entered into a sublicense agreement pursuant to which Hydron and NPDC granted to B&L, inter alia, an exclusive sublicense to make, use, sell, and distribute the Wichterle lens*62 in Japan, Okinawa, South Korea, the Philippines, Taiwan, and Hong Kong (Pacific Sublicense Agreement). The Pacific Sublicense Agreement covered any patents issued in such countries which related to the technology or inventions covered by the Wichterle patents.
2. Litigation with Respect to the Wichterle Patents in Europe
In May 1969, B&L and NPDC agreed that NPDC would assist B&L in obtaining a license from CAS to manufacture and sell soft contact lenses in various European countries. Notwithstanding this agreement, NPDC obtained a license with respect to Europe before B&L could negotiate such a license with CAS. Thereafter, in 1972, B&L began selling soft contact lenses in Europe without a license under the Wichterle patents in Europe.
On November 8, 1972, NPDC and Hydron Europe filed a patent infringement action against B&L and Bausch & Lomb Optical Co. Ltd., a subsidiary of B&L, in the High Court of Justice, Chancery Division, London, Engla