Senza-Gel Corporation, Appellants/cross-Appellees v. John B. Seiffhart, Goehring Meat, Inc., and Ohi, Inc., Appellees/cross

Certified question from the United States District Court for the Eastern District of California, relating to the criteria employed by the court in rendering summary judgment of patent misuse. We answer the inquiry in the affirmative.

Appellants (Senza-Gel) sued all appellees, asserting numerous claims under state and federal law. One such claim was for infringement of Senza-Gel's process patent No. 3,644,125.1 The district court separated the issues of patent validity and direct infringement for trial before all other issues. The jury returned a verdict that the patent was valid and infringed and the court denied Goehring's motion for JNOV. Months later, appellees moved to amend their answer to add an allegation of patent misuse and an antitrust counterclaim. When that motion was granted, appellees (Goehring) filed motions for summary judgment of patent misuse and antitrust violation under Sec. 1 of the Sherman Act, 15 U.S.C. Sec. 1 (1982). The court granted the former and denied the latter.

Before us, Senza-Gel challenges the grant of the motion to amend and the grant of summary judgment of patent misuse. Goehring seeks reversal of the denial of summary judgment of antitrust violation and a determination by this court that it had established certain elements of its counterclaim not reached by the district court.

The district court extensively discussed the evidence, the law, and the parties' arguments. Citing authorities, the court delineated the difference it correctly saw between patent misuse as a defense in a suit for patent infringement and as a basis for a complaint for antitrust violation. The court noted that the parties confused the two concepts (as they have on appeal), and that courts have done so as well.

The court cited the license agreements and testimony of Senza-Gel's principals (submitted at the patent issues trial as proof of commercial success of the patented process) as establishing Senza-Gel's refusal to permit use of the process of the patent in suit unless the user leased Senza-Gel's "macerator" machine, and the undisputed fact that the process and macerator were always leased together. The absence of conflict between the jury verdict and the grant of summary judgment of misuse was noted.

Reviewing legal history, the court discussed the "staple article of commerce" concept as it relates to contributory infringement, patent misuse, and antitrust. The court noted that Senza-Gel had insulated from review the validity of what it called its patent on the macerator. Having determined that Senza-Gel's macerator was useful in non-infringing processes, the court found it a staple article, as was OHI's machine that Senza-Gel called a "knock-off" of the macerator; the court then found that the process and the macerator (which performed one step of the process) were two "things"; and that those two things were "tied".

Because the parties had not raised the issue, the court declined to discuss any question of package licensing, but noted that the mere leasing together of the process and machine would not suffice if the effect were not, as it was here, to expand the "ambit" of the process patent. Senza-Gel's sole argument (that no one asked to lease the process alone and there was thus no coercion) was rejected.

Because Senza-Gel had submitted no evidence of business justification or other adequate response, the court concluded that no genuine issue of material fact on the misuse issue was present.

Noting that Senza-Gel had conditioned access to its process by requiring a lease of the macerator at prices making it uneconomical to lease the process and practice it with a different machine, and that Senza-Gel had thereby extended the scope of the process patent to cover the macerator, the court found misuse and granted Goehring's motion for summary judgment.

The court denied Goehring's motion for summary judgment of antitrust violation because genuine issues of material fact (on whether Goehring had suffered an injury the Sherman Act sought to remedy; whether, for antitrust purposes, as distinguished from patent misuse analysis, a single product was being sold by Senza-Gel) were present.

In disposing of Senza-Gel's motion for reconsideration, the court twice noted that no final judgment had been entered and that the motion was inappropriate under Fed.R.Civ.P. 59(e) or 60(b). Nonetheless, the court employed its inherent power to reconsider its interlocutory decrees and considered the motion in light of its Local Rule 230(k). Senza-Gel's assertion that it had been denied oral argument was correctly rejected not only as insufficient, but as contrary to fact; its list of 14 fact issues was rejected because it reflected no material fact issues; and its notion that it was privileged to argue the motion de novo was in direct disregard of Rule 230(k).

Senza-Gel's sole new argument on reconsideration (business justification) was found unsupported by facts, set forth in affidavits or otherwise, and was not accompanied by any explanation for its untimeliness. The court recognized that a motion for reconsideration is not a chance for a second bite, and that a grant of such a motion not based on newly found, previously unknown facts, would enable the movant to "sandbag" an adversary. Finding that Senza-Gel had not borne its burden of showing why the court should again consider its original arguments or why it should be permitted to raise new defenses to Goehring's motion, the court denied the motion to reconsider.2

The district court's April 11, 1985 Opinion and Order included:

Having found for defendant, it cannot be denied that the concept of patent misuse, outside of an antitrust context, is neither clear nor consistent. Thus, in granting defendants' motion for summary judgment on the issue of patent misuse, it seems to the court that this is a situation where "reasonable minds could differ." Therefore Summary Judgment is hereby GRANTED in favor of defendants, and the matter is certified for interlocutory appeal pursuant to 28 U.S.C. Sec. 1292(b).

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4. The granting of summary judgment on defendants' motion relative to patent misuse and the denial of plaintiffs' motion for injunctive relief are certified for immediate appeal pursuant to 28 U.S.C. Sec. 1292(b).

The district court's June 5, 1985 Order denying Senza-Gel's motion for consideration included:

Alternatively, plaintiffs request the court to clarify its order of certification. This is a reasonable and proper request and the court will now specify the questions certified for interlocutory appeal:

1. Is the proper mode for analysis of a claim of patent abuse [sic, misuse] in a tying context the three step analysis undertaken by this court, namely:

First: Determine whether there are two things tied, i.e., whether there are separable or inseparable items; if so

Second: Determine whether the "thing" which is assertedly tied to the patented item is a staple or non-staple item in commerce; if staple

Third: Determine whether in fact they are tied.

2. In determining whether items are separable or inseparable for patent abuse [sic, misuse] questions, is the correct test whether the two items assertedly tied are separately patentable?

3. Whether this court was correct in holding that the test for prohibited patent misuse turns on whether the tied product is a staple item in commerce, and if the tied product is a staple, a patent misuse defense lies even though the suit alleges direct infringement?

4. Whether the test for a prohibited tying arrangement focuses on whether the patent holder forbids use of the patent without the purchase from him of a staple item in commerce, and thus the absence of any request by a customer for use of the patent separately is not a defense.

5. Whether, despite plaintiffs' failure to tender any facts upon which a business justification for patent misuse might be premised, summary judgment on behalf of the defendant based upon patent misuse should nevertheless be denied since, despite the absence of evidence, it is possible as an abstract matter that plaintiffs can prove a business justification?

The district court, indicating that it did not think the issue met the standards for interlocutory appeal, nonetheless conditionally certified its denial of Goehring's motion for summary judgment of antitrust violation, and this question:

6. In the Ninth Circuit, in an antitrust case, is the proper standard for determining whether the seller is tying one product with another rather than offering a single package, to be determined by looking at consumer behavior? That is, is it correct that the relationship between the producer's selling decision to market demand determines the existence of legally separable products?

Incredibly, though they filed briefs totalling 145 pages, neither party addresses certified question No. 1 in those briefs. Neither says the district court's three-step analysis was or was not proper. Each merely accepts the analysis and then argues its application to this case. Only Senza-Gel's brief even quoted certified question No. 1.

Equally incredible is the parties' total failure either to mention or to address in their briefs any of the other questions certified. As a result of memoranda filed in support of the parties' request that certification be accepted, this court noted only the district court's certification of the grant of summary judgment of misuse, the denial of Senza-Gel's motion for injunction,3 and denial of Goehring's motion for summary judgment of antitrust violation.

The parties have rushed at each other (and at the court) with guns blazing. Each fires at every perceived target of opportunity it can create in relation to the grant of the motions to amend and summary judgment of misuse and the denial of summary judgment of antitrust violation. Senza-Gel proceeds on the erroneous premise that a final judgment was entered on the jury's verdict.4 Neither party fully recognizes that the case is at an interlocutory stage. Neither recognizes the findings, conclusions, and reasoning in the district court's orders of April 11 and June 5, 1985.

While cautioning that we are not here explicating all of the analytical parameters that may be applicable to patent misuse questions in future cases, we find no impropriety in the district court's employment of the three-step analysis it set forth in its certified question No. 1, in light of the record before it in this case. We therefore answer certified question No. 1 in this case in the affirmative. See, e.g., Dawson Chemical Co. v. Rohm & Haas Co., 448 U.S. 176, 100 S.Ct. 2601, 65 L.Ed.2d 696, 206 USPQ 385 (1980).5

Though we do not directly answer the other questions listed above, in view of the parties' failure to brief them, our discussion of the arguments the parties did make bears an obvious relation to the substance of many of those questions.

Though the district court certified only the questions listed above, and though its grant of Goehring's motion to amend is a purely procedural interlocutory matter and was not certified, this court has stated that its mandate includes review of "trial court orders, not merely the particular question certified". United States v. Connolly, 716 F.2d 882, 884-85 (Fed.Cir.1983) (emphasis in original), cert. denied, 465 U.S. 1065, 104 S.Ct. 1414, 79 L.Ed.2d 740 (1984). We therefore consider the arguments made in their briefs here by the parties.

In Appeal No. 85-2780, Senza-Gel attacks the grant of the motion to amend and the grant of summary judgment of misuse.

Senza-Gel devotes the major segments of its briefs to an assertion that the district court abused its discretion in granting Goehring's motion to amend its answer by adding the allegation of patent misuse, offering two arguments: (1) patent misuse was waived as an affirmative defense when not pleaded before the jury returned its verdict on validity and infringement; and (2) patent misuse was barred by res judicata.

Argument (1) fails because: (a) that the amendment led to summary judgment of misuse did not, as Senza-Gel repeatedly says, "preempt the jury verdict." That verdict stands unaffected and, as the district court pointed out, the patent remains valid and infringed;6 (b) the controlling issue on the present motion to amend in the midst of trial is not Goehring's delay, but whether Senza-Gel would be prejudiced.

A motion to amend being entirely a procedural matter not unique to the field of patent law, we apply the discernable law of the Ninth Circuit. See, e.g., Panduit Corp. v. All States Plastic Manufacturing Co., 744 F.2d 1564, 1574-75, 223 USPQ 465, 471 (Fed.Cir.1984).

The district court's action on a motion for leave to amend should be reversed only if the action is an abuse of discretion, in the light of the "strong policy to permit the amending of pleadings." Howey v. United States, 481 F.2d 1187, 1190 (9th Cir.1973) (abuse of discretion to deny motion to amend filed five years after complaint filed). The Ninth Circuit has noted on several occasions, see, e.g., Hurn v. Retirement Fund Trust of Plumbing, Heating & Piping Industry, 648 F.2d 1252, 1254 (9th Cir.1981), that the "Supreme Court has instructed the lower federal courts to heed carefully the command of Rule 15(a), F.R.Civ.P., by freely granting leave to amend when justice so requires." Howey, 481 F.2d at 1190 (citing Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962)); see International Association of Machinists and Aerospace Workers v. Republic Airlines, 761 F.2d 1386, 1390 (9th Cir.1985). Thus the nonmovant bears the burden of showing why amendment should not be granted.

Several factors govern the granting of a motion to amend: (1) undue delay, (2) bad faith, (3) prejudice to the nonmovant, and (4) futility of amendment. Loehr v. Ventura County Community College District, 743 F.2d 1310, 1319 (9th Cir.1984). The single most important factor is whether prejudice would result to the nonmovant. William Inglis & Sons Baking Co. v. ITT Continental Baking Co., 668 F.2d 1014, 1053 n. 68 (9th Cir.1981), cert. denied, 459 U.S. 825, 103 S.Ct. 58, 74 L.Ed.2d 61 (1982); see Wyshack v. City National Bank, 607 F.2d 824, 826 (9th Cir.1979). "Where there is lack of prejudice to the opposing party and the amended complaint is obviously not frivolous, or made as a dilatory maneuver in bad faith, it is an abuse of discretion to deny such a motion." Hurn, 648 F.2d at 1254 (quoting Howey, 481 F.2d at 1190-91); Keniston v. Roberts, 717 F.2d 1295 (9th Cir.1983). " 'The mere fact that an amendment is offered late in the case is ... not enough to bar it; amendments may be offered at trial, or even after reversal and remand.' " Howey, 481 F.2d at 1191 n. 3 (quoting 3 J. Moore, Moore's Federal Practice, Sec. 15.08, 0.835); see also United States v. Webb, 655 F.2d 977, 980 (9th Cir.1981).

Though it bore the burden of showing prejudice, Senza-Gel's sole argument on that score before the district court rested on counsel's statement (unsupported by any affidavit or medical evidence) that a major witness was too ill to testify. That statement was countered before the district court by opposing counsel's statement that the witness had been observed carrying out business as usual. To the extent that the district court was willing to accept counsel's statements in place of evidence, the court apparently accepted that of opposing counsel, an election not to be gainsaid by this court, particularly in light of Senza-Gel's failure to present any evidence in support of its burden.7 Argument (2) fails because the trial is on-going. No final judgment has ever been entered, and Senza-Gel's citations of cases in which judgment had been entered are inapt. Res judicata is simply inapplicable, the action not having been terminated and the decision to permit amendment, as well as any other interlocutory decision or order, being subject to revision by the district court at any time before entry of final judgment. Fed.R.Civ.P. 54.

Senza-Gel having failed to establish prejudice, it is unnecessary to discuss Senza-Gel's argument that Goehring failed to establish excuse for its delay in amending, or Goehring's arguments that the court's bifurcation order precluded trial on misuse, that it learned of the basis for its amendment only from review of the testimony at trial, or that the misuse issue will arise in any event in defense to Senza-Gel's Lanham Act claim and in connection with other claims when those claims are tried.8

The district court committed no abuse of discretion in granting the motion to amend.

Senza-Gel's principals testified at trial that it never licensed or "leased" the process patent on which it was suing without leasing its "Macerator" machine useable in carrying out a step of the patented process, and it is undisputed that the process and machine were, as a matter of established policy, always leased together. Though Senza-Gel had obtained patent No. 3,893,384, which it says covers its machine, it elected not to bring that patent into court and the district court referred to and treated the machine as unpatented for the purposes of this trial. Senza-Gel not only failed to involve its machine patent and to establish the relationship of that patent to the machine leased, it has failed to establish on this certified appeal that the district court was clearly erroneous in finding that the machine as leased was suitable for substantial non-infringing use and therefore a staple article of commerce.9 Both parties cite antitrust cases in contesting the merits of the grant of summary judgment of misuse. The parties thus fail to distinguish between patent misuse as a defensive shield and patent misuse as an offensive sword. In both cases, the patentee's act is the same. That act may serve, as here, as a defense to a charge of patent infringement. That act may also serve as an element in a complaint charging antitrust violation.10 Thus, as the Supreme Court has said, the patentee's act may constitute patent misuse without rising to the level of an antitrust violation. Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 140, 89 S.Ct. 1562, 1585, 23 L.Ed.2d 129, 161 USPQ 577, 593 (1969). All that a successful defense of patent misuse means is that a court of equity will not lend its support to enforcement of a mis-user's patent.

On the record before it, the district court's grant of summary judgment on the defense of misuse was not in conflict with its denial of summary judgment on the counterclaim for antitrust violation.

The sole argument made by Senza-Gel to the district court on the motion for summary judgment of misuse before that motion was granted was that there was "no evidence" that it had coerced lessees, who had thus entered "voluntary" leases. Every other argument now made before us, and every assertion of factual issue, was either never presented to the district court or was belatedly offered in Senza-Gel's motion for reconsideration. They were properly rejected by the district court under Fed.R.Civ.P. 59(e) and Local Rule 230(k).11 Thus we will not consider Senza-Gel's arguments that: consideration must be limited to use of its machine in the ham processing industry; the machine cannot be a staple article because it is patented; Goehring's cases are inapt because they deal with misuse of a product patent; there can be no tie until a lessee uses the machine and performs the process; there can be no tie because its process and machine patents are "blocking" and can therefore be legally "leased" together; and the district court failed to make findings on whether the process could be practiced without the machine, and on whether there is a separate market demand for the machine.12 The arguments that Senza-Gel did make before the district court (that its lessees acted voluntarily and that there was no evidence it ever "coerced" a lessee of the process) are refuted by the record. Its own witnesses said a lease of one was never available without a lease of the other, Senza-Gel submitted no evidence on voluntariness or on business justification, and a witness testified without contradiction that his express request to lease the process without the machine was refused by Senza-Gel.

Accordingly, the grant of summary judgment on the defense of misuse is affirmed.

In appeal No. 85-2781, Goehring requests this court to reverse the denial of its motion for summary judgment of antitrust violation and direct the district court to enter judgment in its favor on its antitrust counterclaim. Both parties devote large segments of their briefs to that request. Neither recognizes that the sole antitrust matter before us resides in the question certified by the district court.13

A denial of summary judgment is not only not a "final judgment", and not appealable, it is not a judgment at all. It is quite simply and solely a determination that one or more issues require a trial. Glaros v. H.H. Robertson Co., 797 F.2d 1564, 1573, 230 USPQ 393, 399 (Fed.Cir.1986).

Here, the district court recognized several issues of fact that must be determined before one can be held liable for an illegal tying arrangement in violation of the antitrust laws. Because the district court determined that a genuine issue of material fact existed as to whether there was a tying arrangement consisting of two separate and distinct products for antitrust purposes, it held that determination dispositive of Goehring's motion for summary judgment. The district court correctly determined there was therefore no need to examine whether there were other genuine issues of material fact in this case, e.g., sufficient economic power in the tying product, and an effect on a "not insubstantial" amount of commerce in the tied product market. See, e.g., Robert's Waikiki U-Drive, Inc. v. Budget Rent-A-Car Systems, Inc., 732 F.2d 1403, 1407 (9th Cir.1984); Moore v. Jas. H. Matthews & Co., 550 F.2d 1207, 1212 (9th Cir.1977), and cases cited therein.

Goehring insists that this court hold "as a matter of law" that it had established the other factual requisites for establishing Senza-Gel's violation of the antitrust laws. Matters of law rest, however, on facts determined. There is no basis for Goehring's request, the district court having entered no findings on those elements and no finding that issues of material fact in relation to them are either present or absent, and this court having no authority to determine facts de novo.

Concerning certified question No. 6, on determination of whether there are two separate and distinct products for antitrust purposes, Goehring argues that Rex Chainbelt, Inc. v. Harco Products, Inc., 512 F.2d 993, 185 USPQ 10 (9th Cir.), cert. denied, 423 U.S. 831, 96 S.Ct. 52, 46 L.Ed.2d 49 (1975), controls, and that the "key factor" in both antitrust and patent misuse contexts is whether the tied product was a "staple", i.e., capable of non-infringing uses. Goehring contends that the district court erred in holding that a question of material fact concerning consumer behavior (character of demand) is involved in deciding its motion for summary judgment of antitrust violation. We disagree.

Rex Chainbelt sheds no light on the question presented. It presented no analysis on the question of whether there were in fact two separate products involved. In that case, the district court found, after a trial, that there were in fact two separate and distinct products. 181 USPQ 432, 436 (C.D.Cal.1973) (citing Locklin v. Switzer, 297 F.2d 39, 131 USPQ 405 (7th Cir.1961)). That finding, though mentioned, was apparently uncontested on appeal.

The district court here relied principally on Klamath-Lake Pharmaceutical Association v. Klamath Medical Service Bureau, 701 F.2d 1276 (9th Cir.), cert. denied, 464 U.S. 822, 104 S.Ct. 88, 78 L.Ed.2d 96 (1983). In Klamath-Lake, the Ninth Circuit stated:

Separateness is determined in part by whether the products are normally sold or used as a unit and whether their joint sale effects savings beyond those of combined marketing. Siegel v. Chicken Delight, Inc., 448 F.2d 43, 48 (9th Cir.1971), cert. denied, 405 U.S. 955, 92 S.Ct. 1172, 31 L.Ed.2d 232 (1972) (describing the "function of the aggregate" test). The critical factor is the extent to which a producer's offerings are in response to independently structured consumer demand. Products that function together and are sold in combination may still be "separate" if consumers would prefer to buy them individually at the price necessary to market them separately. Tying denotes illegal coercion: "Rules governing tying arrangements are designed to strike, not at the mere coupling of physically separable objects, but rather at the use of a dominant desired product to compel the purchase of a second, distinct commodity." Id. at 47 (citing Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 614, 73 S.Ct. 872, 883, 97 L.Ed. 1277 (1953)). Whether a producer's combined products should be considered as separate can be decided only by looking at consumer behavior. It is the relationship of the producer's selling decision to market demand, not the physical characteristics of the products alone, that determines the existence of legally separable products.

701 F.2d at 1289 (footnote omitted) (emphasis supplied); see also Grason Electric Co. v. Sacramento Municipal Utility District, 571 F.Supp. 1504, 1526 (E.D.Cal.1983).

Since Klamath-Lake, the Supreme Court has stated "that the answer to the question whether two products are involved turns not on the functional relationship between them, but rather on the character of the demand for the two items." Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 19, 104 S.Ct. 1551, 1562, 80 L.Ed.2d 2 (1984) (footnote omitted). The Court noted that "a tying arrangement cannot exist unless two separate product markets have been linked." Id. at 21, 104 S.Ct. at 1563. There, the Court held that anesthesiological services were separate from hospital services because there was a "sufficient demand for the purchase of anesthesiological services separate from hospital services to identify a distinct product market in which it is efficient to offer anesthesiological services separately from hospital services." Id. at 21-22, 104 S.Ct. at 1563 (footnote omitted); see also Drinkwine v. Federated Publications, Inc., 780 F.2d 735, 741 (9th Cir.1986) (separability is "a question of character of demand"); Digidyne Corp. v. Data General Corp., 734 F.2d 1336, 1339 (9th Cir.1984) (separability established by demand for tied product), cert. denied, --- U.S. ----, 105 S.Ct. 3534, 87 L.Ed.2d 657 (1985).

Goehring has shown no basis for answering certified question No. 6 in the negative. Its effort to equate the determination of product separability for misuse purposes with product separability for antitrust purposes must fail in light of Ninth Circuit and Supreme Court law, which requires that "consumer behavior" (market demand) be examined to determine the separability of products in determining whether there is a tying arrangement for antitrust purposes. Thus there is no conflict in the district court's holding that there are two products sufficient to sustain a defense of patent misuse, and its determination that a genuine issue of material fact exists on whether there are two products for antitrust purposes.14

We therefore answer the district court's certified question No. 6 in the affirmative.

Certified question No. 1 is answered in the affirmative. Senza-Gel's arguments challenging the district court's grant of the motion to amend and its grant of summary judgment on the defense of patent misuse are rejected. Goehring's arguments seeking reversal of the denial of its motion for summary judgment on its antitrust complaint are rejected. Certified question No. 6 is answered in the affirmative.

AFFIRMED.

BENNETT, Senior Circuit Judge, dissenting.

I respectfully dissent. I would reverse the district court for abusing its discretion in allowing the defendant in an infringement suit to amend its pleadings to include the defense of patent misuse and a counterclaim for antitrust violations where the motion to do so was not filed until 7 months after a jury verdict against that defendant on validity and infringement and where there was no good cause shown for the delay.1 The court's action in allowing the motion was