FALL 2008

Trade Secrets

Course No. 9200-704 (and 804)-801 ID No. 16545	MW 3:00 - 4:30 p.m.	Room L-134
Professor Jay Dratler, Jr.	Room 231D (IP Alcove)	(330) 972-7972	dratler@uakron.edu

Pitney Bowes, Inc. v. Mestre
701 F.2d 1365, 218 U.S.P.Q. (BNA) 987 (11th Cir.),
cert. denied 464 U.S. 893, 104 S.Ct. 239, 78 L.Ed.2d 230 (1983)

Johnson, J.:

[*1366] Pitney Bowes, Inc. brought this action under 28 U.S.C.A. §§ 2201, 2202, seeking a declaration as to its rights and obligations under royalty agreements entered into with Luis Mestre,(1) an inventor of paper collating machines. In its complaint, Pitney Bowes also sought an injunction against Mestre to prevent him from seeking arbitration under the agreements. * * *

I.
The Subject of this appeal concerns five agreements entered into on the following dates:

(1) Rotary Collator Agreement—October 3, 1958;

(2) Vertical Collator Agreement—October 16, 1959;

(3) A-10 Collator Agreement—September 1, 1962;

[*1367]

(2)

As their names suggest, each of the first four agreements licensed the right to manufacture and sell a different paper handling machine. In exchange, Mestre received the right to royalties on each machine manufactured and sold. Mestre had applied for patents on the machines prior to the execution of each agreement, and in each case patents were granted sometime after each agreement went into effect. In its complaint filed in district court, Pitney Bowes contended that each agreement licensed both patent rights and trade secrets(3) in the machines. * * *

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The 1959 Vertical Collator Agreement provided for expiration on the date of Mestre's death, on the date of the last patent to expire, or after 17 years, whichever was latest. The district court held that the Vertical Collator Agreement . . . licensed both patent rights and trade secrets. The Court then applied federal patent law to determine the expiration date of the agreement on the ground that the presence of patent rights in the agreement implicates federal law. Relying on the federal patent case of Brulotte v. Thys Co., 379 U.S. 29, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964), in which the Supreme Court held unenforceable a royalty agreement providing for payments for patent rights after the patents expired, the district judge held that the Vertical Collator Agreement necessarily expired when the last patent on the Vertical Collator expired. The effect of this holding was to cut short the life of the agreement as written, because Mestre died after the last patent expired. The expiration date having been determined as a matter of law, no issue of fact remained for trial on the claim under the Vertical Collator Agreement.

The district court held that the A-10 Collator Agreement and the Auto-Sorter Agreement also licensed both patent rights and trade secrets and thus were hybrid agreements. These two agreements provided for expiration when the last patent expired or after 17 years, whichever was later. Because they licensed patent rights, federal patent law again was relevant to the determination of the expiration dates of the agreements. This time, however, the Brulotte case did not shorten the life of the [*1368] agreements because the last patent on each machine expired after the 17-year periods expired. No questions of fact remained for trial as to either of these agreements and neither party questions the court's judgment as to them on appeal.

The final issue addressed in the district court's summary judgment opinion concerned the rights of the parties after the agreements expired. The court concluded that Pitney Bowes had a right to continue manufacturing and selling the machines after the agreements expired, but it also held that there remained a question of disputed fact as to whether, under state trade secret law, Mestre owned a reversionary right to ongoing payments from Pitney Bowes. Accordingly, the court denied summary judgment on the claim concerning Mestre's post-expiration rights, reserving it for trial.

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II.

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[*1370] III.
The Vertical Collator Agreement, the second agreement negotiated by Thomas Collators Industries and Mestre, provided for the payment of royalties to Mestre in exchange for the "sole and exclusive right" to manufacture and market the Vertical Collator as described in then-pending patent applications.(4) As with the other agreements, although no patents had been issued on the Vertical Collator at the time the agreement was signed, patents subsequently were issued. The agreement contained an acknowledgement of the importance of Mestre's know-how in the machine,(5) and another provision required Thomas Collators Industries and its assignees and sublicensees to keep secret all confidential information concerning the Vertical Collator.(6) Reciting these provisions, the district court agreed with Mestre and Pitney Bowes that the Vertical Collator Agreement licensed both patent rights and trade secrets and thus was a "hybrid" agreement.

As mentioned above, the Vertical Collator Agreement by its terms expired on the latest of three dates: the date of death of Mestre, after 17 years, or when the last patent on the machine expired. Mestre died April 6, 1980, the 17-year period expired October 16, 1976, and the last patent expired October 17, 1978—so by its terms the agreement should have expired April 6, 1980. However, Pitney Bowes, by letter of February 28, 1979, notified Mestre that in its view the Vertical Collator Agreement expired October 17, 1978. The district court, citing Brulotte v. Thys Co., agreed with Pitney Bowes.

In Brulotte, the owner of patents relating to hop-picking machines sold machines to farmers for a flat sum. With each sale the patent owner also issued a use license which required the payment of royalties for a period continuing after the patent expired. [*1371] When the farmers refused to make payments, the patent owner sued. The farmers raised the defense of patent misuse insofar as the agreement extended beyond the expiration dates of the patents. Justice Douglas, writing for the Court, first reviewed the purposes of federal patent law and suggested that one purpose was to ensure that patented ideas enter the public domain upon the expiration of the 17-year period of protection accorded patent owners. At the end of the period, a "free market" was visualized in which the patent holder's monopoly influence would have "no proper place." See 379 U.S. at 30-33. As to the hop picking machine use licenses, two of their provisions suggested that the patent owner had improperly exerted his patent monopoly influence over the farmers. First, the license agreements prevented assignment or removal of the machines from their locations either before or after the patents expired. While such restrictions were "pertinent to protection of the patent monopoly," their continuation after the patents expired was "a telltale sign that the licensor was using the licenses to project its monopoly beyond the patent period." Id. at 32. The second sign of patent misuse was that the royalties due after the patents expired were identical in amount to the royalties owed before expiration. After pointing out these facts, the Court concluded:

"The present licenses draw no line between the term of the patent and the post-expiration period. The same provisions as respects both use and royalties are applicable to each. The contracts are, therefore, on their face a bald attempt to exact the same terms and conditions for the period after the patents have expired as they do for the monopoly period. We are, therefore, unable to conjecture what the bargaining position of the parties might have been and what resultant arrangement might have emerged had the provision for post-expiration royalties been divorced from the patent and nowise subject to its leverage.

per se

Id.

Mestre contends that the district court should not have applied Brulotte and that Brulotte is distinguishable on the ground that the royalty payments in that case were solely for patent rights. The Vertical Collator Agreement, on the other hand, licensed both patent rights and trade secrets. In Aronson v. Quick Point Pencil Co., 440 U.S. 257, 99 S.Ct. 1096, 59 L.Ed.2d 296 (1979) and Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974), the Supreme Court held that trade secret agreements are protected by state law and are not subject to federal preemption by virtue of federal patent law. Focusing on the trade secret aspect of the Vertical Collator Agreement, Mestre argues that Aronson and Kewanee require us to enforce the agreement as written. Otherwise, we would deprive him of his contractual right to eighteen-months' worth of trade secret payments merely because he happened to apply for and obtain patents on the Vertical Collator.

We disagree with Mestre's interpretation of Brulotte. As we understand his argument, he contends that the holding in Brulotte should be limited to agreements licensing only patent rights; if state-protected non-patent rights such as trade secrets are also licensed, courts should enforce the agreement beyond the expiration of the patent on the ground that post-expiration payments are intended for the non-patent rights. Such an interpretation of Brulotte is faulty for two reasons.

First, it ignores the facts of Brulotte. The licenses in that case were for "use," which encompasses more than just patent rights. As the Court's opinion noted, see 379 U.S. at 32, 85 S.Ct. at 179, a use license could be issued for unpatented machines—[*1372] although it would be enforced under state rather than federal law. The Brulotte licenses therefore were, like the Vertical Collator Agreement before us, hybrid licenses for both patent and non-patent consideration. If Mestre's argument—that non-patent consideration in a licensing agreement renders Brulotte inapplicable—were correct, then the Court in Brulotte would have enforced the use licenses beyond the expiration of the patents. Instead, the Court cut off both the patent and non-patent royalties.

The contention that Brulotte does not apply to hybrid agreements is also refuted by dictum in Aronson v. Quick Point Pencil Co., supra. Aronson involved a royalty agreement covering both patent rights and trade secrets in a newly designed keyholder. At the time the agreement was entered into, the licensor had applied for, but not obtained, patents on the keyholder design. The agreement provided for a royalty of 5% of keyholder sales for as long as sales continued, but it also provided for a reduction of royalties to 2 and 1/2% if no patent issued within five years. No patent issued within that time and the manufacturer reduced his royalty payments accordingly. Nineteen years after the parties entered into the agreement, the manufacturer filed an action seeking a declaratory judgment that the agreement was unenforceable. The district court upheld the agreement as written. The court of appeals reversed, holding that the federal patent policy in favor of "the full and free use of ideas in the public domain" required that the manufacturer be relieved of its royalty obligations. Citing Brulotte, the court of appeals observed that, had a patent issued on the keyholder design, the entire royalty obligation would have ceased at the completion of the 17-year patent term, notwithstanding the terms of the agreement. The Supreme Court reversed the court of appeals, holding that federal patent law does not preempt state trade secret law where no patent issues. On this ground, it held that the agreement was enforceable as written. But the Court specifically noted the court of appeals' Brulotte conclusion, 440 U.S. at 261, and at a later point in its opinion even agreed that, if a patent had issued, all royalty obligations would have ceased after 17 years. We find this significant because it clearly indicates that the Supreme Court is willing under certain circumstances to apply Brulotte to terminate royalty rights under a hybrid agreement licensing patent rights and trade secrets.

The second ground upon which we fault Mestre's interpretation of Brulotte is that it misstates the relationship between state trade secret law and federal patent law. While it is true that Aronson and Kewanee constitute support for enforcement of state trade secret law against possible claims of federal preemption, we do not believe that the Supreme Court necessarily intended full trade secret protection when patents actually issue. In Kewanee, no patent was ever applied for; in Aronson, the Court emphasized the fact that, although a patent was applied for, none was ever granted. When a patent issues, the potential exists for direct conflict between federal patent law and state trade secret law. When such a conflict occurs, the question is no longer one of federal preemption; it is instead one of federal supremacy.(7)

Pitney Bowes does not contend that all hybrid agreements providing for post-patent-expiration payments necessarily raise a direct conflict with federal patent laws. Instead, it argues that the defect in the Vertical Collator Agreement is its failure to allocate payments between trade secrets and patent rights. Citing Veltman v. Norton Simon, Inc., 425 F.Supp. 774, 776 (S.D.N.Y.1977), it suggests that, had the parties to the agreement undertaken such an allocation, reduced payments for trade secrets after the patents expired might not have directly conflicted with federal patent law and therefore might have been permissible. The district court seems to have adopted this view. See also Modrey v. American Gage & Machine Co., 339 F.Supp. 1213, 1217-18 (S.D.N.Y.1972) (agreement providing for reduced royalties of 3% after patent expires does not violate Brulotte). In light of our conclusion infra that the Vertical Collator Agreement violates federal patent law, and the fact that there is no allocation in the agreement, we need not decide whether allocation—or some similar provision—would have rendered it enforceable. Indeed, the Supreme Court has never addressed the question whether a hybrid agreement in which patents issue can ever survive the expiration of the patents. The court in Brulotte, however, applied a per se rule to agreements containing the same terms before and after the patent expires because it was "unable to conjecture what the bargaining position of the parties might have been" had no patent been involved. 379 U.S. at 32. The implication of this language is that, if a patent owner can prove that he did not use his patent monopoly leverage to exact reduced post-expiration trade secret payments, then there would be no direct conflict with federal law and the agreement would be enforced.

With these general considerations in mind, we turn to an analysis of the Vertical [*1373] Collator Agreement. As in Brulotte, two provisions in the agreement suggest that the patentee used the leverage of his patent to project its monopoly beyond the 17-year patent period. First, the "exclusive rights" granted under the agreement applied equally before and after the expiration of the patent. Like the assignment and removal restrictions on the hop-picking machines in Brulotte, the grant of exclusive rights is "pertinent to protection of the patent monopoly," but its "applicability to the post-expiration period is a telltale sign that the licensor was using the license to project its monopoly beyond the patent period." 379 U.S. at 32. Second, the agreement required Pitney Bowes to pay royalties at the same rate and on the same basis after the patents expired that it paid while the patent was in effect. Assuming that the value of the agreement to Pitney Bowes was not as high after the patents expired, it is reasonable to assume that at least some part of the post-expiration payment constituted an effort to extend payments for patent rights beyond the patent period. Thus, we conclude that the Vertical Collator Agreement is unenforceable under Brulotte.(8)

IV.
* * * [*1375]

[The court decided that it had lacked jurisdiction to consider Mestre's appeal of the district court's injunction against arbitration. However, it its footnote 7, the court made the following remarks:] [court's footnote 7] Although we do not reach the merits of the district court's order denying Mestre's motion to dissolve the injunction, our discussion of the role of federal patent law in determining the parties' rights amply supports the district court's conclusion that the claims "present issues too intertwined with federal law and policy to be arbitrable." Moreover, still before the district court are substantial questions concerning the possible role of federal patent law in determining Mestre's right to post-expiration trade secret payments.

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V.
For the reasons set out above, we AFFIRM the district court's summary judgment in favor of Pitney Bowes as to the expiration date of the Vertical Collator Agreement. We DISMISS the appeal of Pitney Bowes as to the expiration date of the Rotary Collator Agreement and the post-expiration rights under all four agreements. We also hold that we are without jurisdiction to consider Mestre's arguments against the district court's injunction against arbitration.

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Footnotes

1. [court's footnote 1] Luis Mestre died during the pendency of this litigation. His wife, Celina Mestre, was substituted as a personal representative of his estate. For convenience, all references in this opinion to Mestre are in the masculine.

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2. [court's footnote 3] The agreements were entered into by Mestre and Thomas Collators Industries, Inc. Pitney Bowes acquired Thomas Collators Industries shortly after the 1965 Amendment Agreement and succeeded to the rights contained in the four prior agreements and the Amendment Agreement.

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3. [court's footnote 4] For purposes of this litigation, the district court treated trade secrets as interchangeable with know-how, and we do the same.

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4. [court's footnote 9] Article I of the agreement contained the license:

"The License

"Mestre hereby grants to Thomas, its successors and assigns, the sole and exclusive right and license to make, manufacture, have made or manufactured by others, use, import, export, sell and deal in the Vertical Collator specifically described in said patent applications and any and all modifications thereof and improvements thereon that Mestre may hereafter make or develop and under any letters patent which may issue thereon and, subject to the obtaining of Mestre's prior written consent, to sublicense others to do so, within the United States of America, its territories and possessions, and in foreign countries throughout the world."

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5. [court's footnote 10] The second "whereas" clause provided:

"WHEREAS, Thomas has begun the manufacture and development for sale of the Vertical Collator solely by virtue of Mestre's disclosure to it of the principles thereof and his transfer to it of necessary manufacturing and technical `know-how' necessary for the commercial production thereof . . ." Back to Text

6. [court's footnote 11] Article II(e) provided in pertinent part:

"No manufacturer shall be employed by Thomas, its assignees or sublicensees to manufacture the Vertical Collator, or such substantial components thereof as are likely to develop knowledge of the essential elements of the manufacture thereof, unless such manufacturer shall first agree in writing to keep secret all confidential information relating to the Vertical Collator, parts thereof or attachments thereto." Back to Text

7. [court's footnote 12] This does not mean that parties cannot agree to license both trade secrets and patent rights on patents actually issued. As the Court in Kewanee noted, the purposes of patent protection and trade secret protection usually are entirely different, and the enforcement of trade secrets need not necessarily undermine federal patent policy. But if and when their purposes conflict directly, federal supremacy requires that federal patent law determine the rights under the agreement.

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8. [court's footnote 13] At oral argument, Mestre conceded that the Rotary Collator Agreement was a hybrid agreement licensing both patent rights and trade secrets—just like the other three licensing agreements. Despite our holding that we do not have jurisdiction to consider the appeal as to the Rotary Collator Agreement, the district court may choose to accept this concession; if so, Brulotte would apply to the Rotary Collator Agreement in the same manner as it does to the Vertical Collator Agreement. Thus, the Rotary Collator Agreement would expire on the date that the last patent on the Rotary Collator expired, and the question reserved for tria—namely, the starting date of the 17-year period identified in the amended expiration clause of the Rotary Collator Agreement—would be rendered moot.

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