Zenith Radio Corporation v. Hazeltine Research, Inc./Concurrence Harlan
United States Supreme Court
ZENITH RADIO CORPORATION, Petitioner, v. HAZELTINE RESEARCH, INC., et al.
Argued: Jan. 22, 1969. ---
Mr. Justice HARLAN, concurring in part and dissenting in part.
I concur in Parts I and II of the Court's opinion. However, I do not join Part III, in which the Court holds that a patent license provision which measures royalties by a percentage of the licensee's total sales is lawful if included for the 'convenience' of both parties but unlawful if 'insisted upon' by the patentee.
My first difficulty with this part of the opinion is that its test for validity of such royalty provisions is likely to prove exceedingly difficult to apply and consequently is apt to engender uncertainty in this area of business dealing, where certainty in the law is particularly desirable. In practice, it often will be very hard to tell whether a license provision was included at the instance of both parties or only at the will of the licensor. District courts will have the unenviable task of deciding whether the course of negotiations establishes 'insistence' upon the suspect provision. Because of the uncertainty inherent in such determinations, parties to existing and future licenses will have little assurance that their agreements will be enforced. And it may be predicted that after today's decision the licensor will be careful to embellish the negotiations with an alternative proposal, making the court's unravelling of the situation that much more difficult.
Such considerations lead me to the view that any rule which causes the validity of percentage-of-sales royalty provisions to depend upon subsequent judicial examination of the parties' negotiations will disserve rather than further the interests of all concerned. Hence, I think that the Court has fallen short in failing to address itself to the question whether employment of such royalty provisions should invariably amount to patent misuse. 
My second difficulty with this part of the Court's opinion is that in reality it overrules an aspect of a prior decision of this Court, Automatic Radio Mfg. Co. v. Hazeltine Research, Inc., 339 U.S. 827, 70 S.Ct. 894, 94 L.Ed. 1312 (1950), without offering more than a shadow of a reason in law or economics for departing from that earlier ruling. Despite the Court's efforts to distinguish Automatic Radio, it cannot be denied that the Court there sustained a Hazeltine patent license of precisely the same tenor as the one involved here, on the ground that '(t)his royalty provision does not create another monopoly; it creates no restraint of competition beyond the legitimate grant of the patent.' 339 U.S., at 833, 70 S.Ct., at 897.
In finding significance for present purposes in some of the qualifying language in Automatic Radio, I believe that the Court today has misconstrued that opinion. A reading of the opinion as a whole satisfies me that the Automatic Radio Court did not consider it relevant whether Hazeltine Research had 'insisted' upon inclusion of the disputed provision, and that in emphasizing that the royalty terms had no 'inherent' tendency to extend the patent monopoly and were not a 'per se' i suse of patents, the Court was simply endeavoring to distinguish prior decisions in which patent misuse was found when the patent monopoly had been employed to 'create another monopoly or restraint of competition'. 39 U.S., at 832, 70 S.Ct., at 897  (Emphasis added.) Until now no subsequent decision has in any way impaired this aspect of Automatic Radio. 
Since the Court's decision finds little if any support in the prior case law, one would expect from the Court an exposition of economic reasons for doing away with the Automatic Radio doctrine. However, the nearest thing to an economic rationale is the Court's declaration that:
'just as the patent's leverage may not be used to extract from the licensee a commitment to purchase, use, or sell other products according to the desires of the patentee, neither can that leverage be used to garner as royalties a percentage share of the licensee's receipts from sales of other products; in either case, the patentee seeks to extend the monopoly of his patent to derive a benefit not attributable to use of the patent's teachings.' Ante, at 136.
The Court then finds in the patentee a heretofore nonexistent right to 'insist upon paying only for use, and not on the basis of total sales * * *.' Ante, at 139.
What the Court does not undertake to explain is how insistence upon a percentage-of-sales royalty enables a patentee to obtain an economic 'benefit not attributable to use of the patent's teachings,' thereby involving himself in patent misuse. For it must be remembered that all the patentee has to license is the right to use his patent. It is solely for that right that a percentage-of-sales royalty is paid, and it is not apparent from the Court's opinion why this method of determining the amount of the royalty should be any less permissible than the other alternatives, whether or not it is 'insisted' upon by the patentee.
One possible explanation for the Court's result, which seems especially likely in view of the Court's exception for cases where the provision was included for the 'convenience' of both parties, is a desire to protect licensees against overreaching. But the Court does not cite, and the parties have not presented, any evidence that licensees as a class need such protection.  Moreover, the Court does not explain why a royalty based simply upon use could not be equally overreaching.
Another possible justification for the Court's result might be that a royalty based directly upon use of the patent will tend to spur the licensee to 'invent around' the patent or otherwise acquire a substitute which costs less, while a percentage-of-sales royalty can have no such effect because of the licensee's knowledge that he must pay the royalty regardless of actual patent use. No hint of such a rationale appears in the Court's opinion. Moreover, under this theory a percentage-of-sales royalty would be objectionable largely because of resulting damage to the rest of the economy, through less efficient allocation of resources, rather than because of possible harm to the licensee. Hence, the theory might not admit of the Court's exception for provisions included for the 'convenience' of both parties.
Because of its failure to explain the reasons for the result reached in Part III, the Court's opinion is of little assistance in answering the question which I consider to be the crux of this part of the case: whether percentage-of-sales royalty provisions should be held without exception to constitute patent misuse. A recent economic analysis  argues that such provisions may have two undesirable consequences. First, as has already been noted, employment of such provisions may tend to reduce the licensee's incentive to substitute other, cheaper 'inputs' for the patented item in producing an unpatented end-product. Failure of the licensee to substitute will, it is said, cause the price of the end-product to be higher and its output lower than would be the case if substitution had occurred.  Second, it is suggested that under certain conditions a percentage-of-sales royalty arrangement may enable the patentee to garner for himself elements of profit, above the norm for the industry or economy, which are properly attributable not to the licensee's use of the patent but to other factors which cause the licensee's situation to differ from one of 'perfect competition,' and that this cannot occur when royalties are based upon use. 
If accepted, this economic analysis would indicate that percentage-of-sales royalties should be entirely outlawed. However, so far as I have been able to find, there has as yet been little discussion of these matters either by lawyers or by economists. And I find scant illumination on this score in the briefs and arguments of the parties in this case. The Court has pointed out both today and in Automatic Radio that percentage-of-sales royalties may be administratively advantageous for both patentee and licensee. In these circumstances, confronted, as I believe we are, with the choice of holding such royalty provisions either valid or invalid across the board, I would, as an individual member of the Court, adhere for the present to the rule of Automatic Radio.
- ↑ I find it unnecessary to consider the further question whether inclusion of such a provision should be held to violate the antitrust laws.
- ↑ The Automatic Radio Court explictly distinguished a number of cases of that kind, including United States v. United States Gypsum Co., 333 U.S. 364, 68 S.Ct. 525, 92 L.Ed. 746 (1948), and Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661, 64 S.Ct. 268, 88 L.Ed. 376 (1944). See 339 U.S., at 832-833, 70 S.Ct., at 896-897.
- ↑ Brulotte v. Thys Co., 379 U.S. 29, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964), involved a different question: whether a royalty based solely upon use of the invention could be collected for use occurring after the patent's expiration.
- ↑ Cf. American Photocopy Equip. Co. v. Rovico, 7 Cir., 359 F.2d 745 (1966).
- ↑ Baxter, Legal Restrictions on Exploitation of the Patent Monopoly: An Economic Analysis, 76 Yale L.J. 267 (1966).
- ↑ See id., at 299-301, 302-306.
- ↑ See id., at 300-301, 302-306, 331-332.
This work is in the public domain in the United States because it is a work of the United States federal government (see 17 U.S.C. 105).