SCM Corp. v. Xerox Corp.
645 F.2d 1195 (1981)
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Rule of Law:
Where a patent is lawfully acquired, the patent holder's subsequent unilateral refusal to license the patent is permissible under patent law and cannot form the basis of an antitrust violation, even if the patent's success leads to the creation of an economic monopoly. The lawfulness of a patent acquisition under the antitrust laws is assessed based on the market conditions and the acquirer's market power at the time of the acquisition.
Facts:
- In the 1930s, Chester Carlson invented the process of xerography.
- In 1944, after numerous rejections from other companies, Carlson entered into an agreement with Battelle Memorial Institute, a non-profit research organization, which received an exclusive license to develop and patent improvements on the invention.
- Between 1947 and 1951, Xerox Corporation (then Haloid Company) entered into a series of agreements with Battelle, eventually securing an exclusive worldwide license to the xerography patents, which included an obligation to seek sublicensees.
- In a final 1956 agreement, Xerox acquired full title to the core Carlson patents and an exclusive license to all of Battelle's existing and future xerography patents. Critically, this agreement eliminated Xerox's obligation to sublicense the technology.
- At the time of the 1956 agreement, no market for automatic plain-paper copiers existed, and the commercial success of such a product was not a foregone conclusion.
- In 1960, Xerox introduced the 914, its first automatic plain-paper copier, which was enormously successful and created a new market.
- From 1960 to 1970, Xerox enjoyed a complete monopoly in the plain-paper copier market it had created.
- SCM Corporation, a competitor in the coated-paper copier market, repeatedly requested licenses from Xerox to produce plain-paper copiers, but Xerox consistently refused.
Procedural Posture:
- SCM Corporation sued Xerox Corporation in the U.S. District Court for the District of Connecticut, alleging violations of the Sherman and Clayton Acts.
- After a lengthy trial, a jury found in favor of SCM, concluding that Xerox's 1956 patent acquisition agreement with Battelle, and its subsequent refusal to license, unlawfully excluded SCM from the market.
- The jury awarded SCM damages which, when trebled, amounted to $111.3 million on the exclusion claim.
- The district court judge, while not disturbing the jury's factual findings, ruled as a matter of law that monetary damages could not be imposed for Xerox's unilateral refusal to license its lawfully acquired patents and dismissed SCM's claim for damages.
- The district court also set aside a separate jury award for damages related to Xerox's pricing plan, finding SCM had failed to prove causation.
- SCM Corporation, as appellant, appealed the district court's dismissals to the U.S. Court of Appeals for the Second Circuit; Xerox Corporation is the appellee.
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Issue:
Does a company's acquisition of patents violate the Sherman or Clayton Acts when the acquisition occurs before the relevant market for the patented products exists, thereby subjecting the company to monetary damages for its subsequent refusal to license those patents?
Opinions:
Majority - Meskill, J.
No. A company's acquisition of patents before a relevant market exists does not violate the antitrust laws, and its subsequent refusal to license those lawfully acquired patents cannot be the basis for monetary damages. To hold otherwise would severely undermine the incentives of the patent system. The lawfulness of a patent acquisition must be judged based on the market power of the acquiring party at the time of the acquisition. Here, Xerox acquired the patents years before the plain-paper copier market existed, at a time when it possessed no market power in that nascent field. Because the patents were acquired lawfully, Xerox's subsequent unilateral refusal to license them was a permissible exercise of its patent rights, not an antitrust violation. SCM's claims under Sherman Act §1, Sherman Act §2, and Clayton Act §7 all fail because they are predicated on conduct that occurred when no relevant market existed, and the subsequent refusal to license was protected by the patent grant.
Analysis:
This decision establishes a strong safe harbor for companies that acquire patents in nascent or non-existent markets. It clarifies that antitrust scrutiny of a patent acquisition focuses on the market realities at the time of the transaction, not on a 'foreseeability' test of what the market might become. By separating the legality of the acquisition from the later exercise of exclusionary rights, the court protects the core function of the patent system—rewarding innovation with a temporary monopoly. This precedent makes it difficult for competitors to use antitrust laws to compel licensing from a monopolist whose market power was built on lawfully acquired patents that created a new market.
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