Chapter 11: Preemption of State Law Protection of Software by Federal Intellectual Property Law
Gibbons v. Ogden
United States Supreme Court
22 U.S. (9 Wheat.) 1 (1824)
The acts of the Legislature of the State of New York, granting to Robert Livingston and Robert Fulton the exclusive navigation of all the waters within the jurisdiction of that State, with boats moved by fire or steam, for a term of years, are repugnant to that clause of the Constitution of the United States which authorizes Congress to regulate commerce, so far as the said acts prohibit vessels licensed, according to the laws of the United States, for carrying on the coasting trade, from navigating the said waters by means of fire or steam.
Aaron Ogden filed his bill in the Court of Chancery of New York against Thomas Gibbons, setting forth the several acts of the Legislature thereof, enacted for the purpose of securing to Robert R. Livingston and Robert Fulton, the exclusive navigation of all the waters within the jurisdiction of that State, with boats moved by fire or steam, for a term of years which has not yet expired; and authorizing the Chancellor to award an injunction, restraining any person whatever from navigating those waters with boats of that description. The bill stated an assignment to the complainant, Ogden, of the right to navigate the waters between Elizabethtown, and other places in New Jersey, and the City of New York; and that Gibbons, the defendant below, was in possession of two steam boats which were actually employed in running between New York and Elizabethtown, in violation of the exclusive privilege conferred on the complainant, and praying an injunction to restrain the said Gibbons from using the said boats, or any other propelled by fire or steam, in navigating the waters within the territory of New York. The Chancellor was of the opinion that the said acts were not repugnant to the Constitution and laws of the United States, and were valid. This decree was affirmed in the highest court of law and equity in the State, and it was thereupon brought to this Court by appeal.
Arguments of Counsel
Mr. Daniel Webster, for the appellant [defendant Gibbons], admitted that there was a very respectable weight of authority in favor of the decision which was sought to be reversed. The laws in question, he knew, had been deliberately re-enacted by the Legislature of New York; and they had also received the sanction at different times of all her judicial tribunals, than which there were few, if any, in the country more justly entitled to respect and deference. The disposition of the Court would be, undoubtedly, to support, if it could, laws so passed and so sanctioned. He admitted, therefore, that it was justly expected of him that he should make out a clear case; and unless he did so, he did not hope for a reversal.
... There was, lastly, that provision of the Constitution which gives Congress power to promote the progress of science and the useful arts, by securing to authors and inventors, for a limited time, an exclusive right to their own writings and discoveries. Congress had exercised this power, and made all the provisions which it deemed useful or necessary. The States might, indeed, like munificent individuals, exercise their own bounty towards authors and inventors, at their own discretion. But to confer reward by exclusive grants, even if it were but a part of the use of the writing or invention, was not supposed to be a power properly to be exercised by the States. Much less could they, under the notion of conferring rewards in such cases, grant monopolies, the enjoyment of which should be essentially incompatible with the exercise of rights holden under the laws of the United States. He should insist, however, the less on these points, as they were open to counsel who would come after him on the same side, and as he had said so much upon what appeared to him the more important and interesting part of the argument.
Mr. Oakley [N.Y. Attorney General], for the respondent [sole licensee of the N.Y. steamboat patent for the route], stated that there were some general principles applicable to this subject, which might be assumed, or which had been settled by the decisions of this Court, and which had acquired the force of maxims of political law....
The learned counsel here recapitulated the principles laid down, and proceeded to apply them to the discussion of the cause, which he divided into two branches: (1) The supposed repugnancy of the laws of New York to the power of Congress on the subject of patents and copyrights. (2) Their supposed conflict with the power of Congress to regulate commerce.
As to the first, the words of the Constitution are, “Congress shall have power to promote the progress of science and the useful arts, by securing, for limited times, to authors and inventors, the exclusive right to their respective writings and discoveries.”
This power is concurrent, according to all the principles before laid down. It is clearly a power appertaining to sovereignty, and, as such, vested in the Legislature of New York, before the formation of the Constitution. A power to promote science and the useful arts, is highly important to every civilized society. It embraces all the means of education, and all kinds of mechanical labor and improvements. It is constantly exercised by all governments, as a sovereign authority, by laws for the promotion of education in all its branches, by bounties for the encouragement of discoveries and new methods of business, and by the grant of exclusive rights and privileges for the same end. It has frequently been exercised by the State of New York, and by other States, before the adoption of the Constitution. It is not granted exclusively to Congress. No exclusive terms are used. The grant is affirmative and general, like all the other powers. There is no express prohibition upon the States against the exercise of it. Nor is it exclusive in its nature. It does not owe its existence or creation to the Union. When exercised by a State, it does not operate in any manner beyond the territorial jurisdiction of that State. From its nature, it admits of a great variety of regulations, both by local and general laws, which may exist harmoniously together. Being thus a concurrent power, it follows, according to the principles already established, that the State may exercise it at all times, and in every mode, until an actual and practical conflict arises between a right exercised under a statute of Congress, and the same right claimed to be exercised under the State.
The power, as granted in the Constitution, is a limited power. It is a clear principle, that when the means of executing any given power are specified in the grant, Congress cannot take, by implication, any other means, as being necessary and proper to carry that power into execution. This power, then, is limited: (1) As to the persons and the objects in regard to which it may be exercised: these are, “authors and inventors, writings and discoveries.” This enumeration excludes all right in Congress to legislate on the subject of any improvement, which is not an “invention,” either domestic or foreign. It excludes also all right to legislate for the benefit of any person who is not himself the “inventor.” (2) As to the means of executing the power, and the time during which those means may be exercised. They are by “securing the exclusive right for limited times.”
The power, considered in itself, is supreme, unlimited, and plenary. No part of any sovereign power can be annihilated. Whatever portion, then, of this power was not granted to Congress remains in the States. Consequently, the States have exclusive authority to promote science and the arts by all other modes than those specified in the Constitution, without limitation as to time, person, or object; and the Legislature is the sole judge of the expediency of any law on the subject.
But this power, though limited in Congress, is still (as has been seen) concurrent in the States. It follows, then, from all the principles before laid down relative to the exercise of concurrent powers, that a State may exercise it by the same means and towards the same persons and objects with Congress. A State may, therefore, grant patents and copyrights, which would secure to the inventors and authors the benefit of their discoveries and writings, within the limits of the State. In such cases, the citizens of other States might use the invention or publish the book at pleasure. But if a patent or copyright should be obtained under the law of Congress, the right under the State grant would cease as against that of the United States.
Suppose the author or inventor does not apply for a patent or copyright from the United States, or is willing to secure the exclusive right within any one State only, and leave the invention common in every other part of the Union; may not that one State secure the right within its own territory? This question may be answered by seeing how far Congress has exercised the power. An examination of the different patent laws will show that Congress has in various particulars omitted to exercise the entire power given to them by the Constitution. Thus, by several of these laws the right of obtaining a patent is confined to citizens and consequently the power of granting patents to aliens is left to the States. The whole power is inoperative until Congress acts under it by legislating.
But Congress has confined its statutes to cases of invention, as the Constitution directs. Where then is the power to reward or encourage the introduction of useful machines or inventions from abroad? Or the establishment of any art, when invented at home, and the discoverer does not apply for a patent? Or where the invention is given to the public, and great expense must be incurred to put it into use? Congress has no power over them. The power, being sovereign, must exist somewhere, and is, therefore, exclusively in the States. If the nature of the power which is given to Congress be examined, it will be found that it confers no authority to create or grant any right or property. It is clearly founded on the presumption, that the right or property may exist, independent of the power.
It appears, then, that the power is founded on the basis of a pre-existing right of property, from the nature and origin of the right, as before stated, and from the terms in which the power itself is granted. The word “secure,” implies the existence of something to be secured. It does not purport to create or give any new right, but only to secure and provide remedies to enforce a preexisting right throughout the Union. This power differs essentially from the sovereign power to create and grant an exclusive right.
What then is the effect of a patent? It creates no new right. In secures the patentee, for a limited time, the exclusive right to his invention; so that he has the same exclusive right in it, that he has in any other kind of property. His right, however, is secured more extensively than any State law could secure it. But, within the limits of the State, a patent under the local law would be just as effectual. What is the situation of the right, after the expiration of a patent? The right under the common law of the State, may be considered as perpetual.
The act of Congress cannot destroy the perpetuity of a right held under the law of New York, and which the act of Congress has only secured for a certain time, to a greater extent, and by means of more, effectual remedies. The right, then, remains, at the expiration of the patent, in the same condition as at its commencement, so far as regards the laws of New York, and within the territorial limits of that State, but cannot be asserted in other States. Even if this were not so, and it should be considered that the right becomes common, at the expiration of the patent, then it is like all other common rights, subject to the control of the municipal laws of the State. It is of the essence of sovereignty to control and regulate all common rights. The Legislature, possessing “supreme legislative power,” may destroy a common right, either by abolishing it, and prohibiting the use of it altogether, or by converting it into an exclusive right. Thus, a right of way may be common, either by land or water, and it may be shut up by law, and the use of it prohibited. In the same manner, as to patent rights and literary productions: if, after a patent or copyright has expired, the right to use or publish becomes common, it may be controlled by law, and turned into a private right. So that a State law may continue or extend a patent right at pleasure.
Thus, it follows, that whether the right of the patentee remains in him, after the expiration of his patent, at common law, or whether its use becomes common to all, it is subject to the State law, in the same manner, and to the same extent, as all other rights, and may, consequently, be controlled, limited, extended, or prohibited, at the pleasure of the Legislature.
But the State may control or prohibit the use of any patented thing, during the existence of the patent. The principles may be applied to the law now in question, which gives an exclusive right, and forbids any person to use the thing which is the subject of the right, without the license of the persons in whom it is vested. Let it be supposed that, from reasons of public policy, the laws of New York had prohibited the use of steam boats entirely, and had directed the Court of Chancery to restrain them by injunction, would not the prohibition have been a valid one? And if so, may not the State determine that it is against the public interest that steam boats should be built or navigated unless under the direction, or with the license, of an individual, who may be thought particularly skilful in that business? It might, therefore, be contended, that this injunction is to be sustained, what ever might become of the respondent’s exclusive right.
Mr. Emmett, on the same side, stated that the question sought to be presented, was the complete invalidity of these laws of New York, as being repugnant to the Constitution of the United States.
The State of New York, by a patient and forbearing patronage of ten years, to Livingston and Fulton, by the tempting inducement of its proffered reward, and by the subsequent liberality of its contract, has called into existence the noblest and most useful improvement of the present day. Genius had contended with its inherent difficulties, for generations before; and if some had nearly reached, or some even touched, the goal, they sunk exhausted, and the result of their efforts perished in reality, and almost in name. Such would, probably, have been the end of Fulton’s labors; and, neither the wealth and talents of his associate, nor the resources of his own great mind, would have saved him from the fate of others, if he had not been sustained, for years, by the wise and considerate encouragement of the State of New York. She has brought into noonday splendor, an invaluable improvement to the intercourse and consequent happiness of man, which, without her aid, would, perhaps, have scarcely dawned upon our grandchildren. She has not only rendered this service to her own citizens, but the benefits of her policy have spread themselves over the whole Union. Where can you turn your eyes, and where can you travel, without having your eyes delighted, and some part of the fatigues of your journey relieved, by the presence of a steam boat? The Ohio and Mississippi, she has converted into rapid channels for communicating wealth, comforts and enjoyments, from their mouths to their head waters. And the happy and reflecting inhabitants of the States they wash, may well ask themselves, whether, next to the Constitutions under which they live, there be a single blessing they enjoy from the art and labor of man, greater than what they have derived from the patronage of the State of New York to Robert Fulton. But the mighty benefits that have resulted from those laws, are not circumscribed, even by the vast extent of our Union. New York may raise her head, she may proudly raise her head, and cast her eyes over the whole civilized world; she there may see its countless waters bearing on their surface countless offsprings of her munificence and wisdom. She may fondly calculate on their speedy extension in every direction and through every region, from Archangel to Calcutta; and justly arrogating to herself the labors of the man she cherished, and, conscious of the value of her own good works, she may turn the mournful exclamation of Ćneas into an expression of triumph, and exultingly ask,
Quae regio in terris, nostri non plena laboris? [What region of the earth is not full of our calamities? -- Aeneid.]
And it is, after all those advantages have been acquired and realized to the world — after numerous individuals have embarked their fortunes, or the faith of those grants, and a ten years acquiescence in the decision by which they were sanctioned—after the property they have created has been diffused among a multitude of possessors—after it has become the sole support of the widow and the orphan — after it has received and exhausted the accumulated savings of the laborious and industrious heads of families, that a decision is required, which cannot, indeed, undo the lasting benefits already procured to the world, but would, assuredly, undo many of those who have confided their wealth and means to the stability and observance of those laws!
The United States Attorney-General [Mr. Wirt] insisted, that the laws of New York were unconstitutional and void:
1. Because they are in conflict with powers exclusively vested in Congress, which powers Congress has fully exercised, by laws now subsisting and in full force.
2. Because, if the powers be concurrent, the legislation of the State is in conflict with that of Congress, and is, therefore, void.
He stated, that the powers with which the laws of New York conflict, are the power “to promote the progress of science and the useful arts, by securing, for a limited time, to authors and inventors, the exclusive right to their respective writings and inventions,” and the power “to regulate commerce with foreign nations, and among the several States.” If these powers were exclusive in Congress, and it had exercised them by subsisting laws; and if the laws of New York interfere with the laws of Congress, by obstructing, impeding, retarding, burdening, or in any other manner controlling their operation, the laws of New York are void, and the judgment of the State Court, founded on the assumption of their validity, must be reversed.
If Congress, in the lawful exercise of its power, says that a thing shall be done, and the State says it shall not; or, which is the same thing, if Congress says that a thing shall be done, on certain terms, and the State says it shall not be done, except on certain other terms, the repugnancy has all the epithets which can be lavished upon it, and the State law must be void for this repugnancy.
Congress has the power to promote the progress of science and the useful arts; but only in one mode, viz. by securing, for a limited time, to authors and inventors, the exclusive right to their respective writings and discoveries. This might be an exclusive power, and was contended to be so. Yet, there are a thousand other modes in which the progress of science and the useful arts may be promoted, as, by establishing and endowing literary and philosophical societies, and many others which might be mentioned. Hence, notwithstanding this particular exclusive grant to Congress, of one mode of promoting the progress of science and the useful arts, the States may rightfully make many enactments on the general subject, without any repugnance with the peculiar grant to Congress.
To come now to the question, whether these State laws be repugnant to this grant of power, we must first inquire, why it was conferred on Congress? Why was it thought a matter of sufficient importance to confer this power upon the national government? The answer to this question would be found in the history of the country, in the nature of our institutions, and the great national objects which the Constitution had in view. The country was in its infancy; its population was small; its territory immense: it had recently thrown off its bondage by the war of the revolution, and was left exhausted and poor—poor in everything but virtue and the love of country. It was still dependent on the arts of Europe, for all the comforts, and almost all the necessaries of life. We had hardly any manufactures, science, or literature of our own. Our statesmen saw the great destiny which was before the nation, but they saw also the necessity of exciting the energies of the people, of invoking the genius of invention, and of creating and diffusing the lights of science. These were objects, in which the whole nation was concerned, and were, therefore, naturally and properly confided to the national government. The States, indeed, might have exercised their inherent power of legislating on this subject; but their sphere of action was comparatively small; their regulations would naturally have been various and conflicting. Discouragement and discontent would have arisen in some States, from the superior privileges conferred on the works of genius in others; contests would have ensued among them on the point of the originality of inventions; and laws of retortion and reprisal would have followed. All these difficulties would be avoided by giving the power to Congress, and giving it exclusively of the States. If it were wisely exerted by Congress, there could be no necessity for a concurrent exercise of the power by the States.
The terms of the grant are, “Congress shall have power to promote the progress of science and the useful arts, by securing, for a limited time, to authors and inventors, the exclusive right to their respective writings and discoveries.” This exclusive right is to be co-extensive with the territory of the Union. The laws to be made for securing it, must be uniform, and must extend throughout the country. The exclusive nature of every power is to be tested by the character of the acts which Congress is to pass. The exclusiveness results from the character of the right which they are to confer. It is to be exclusive. It is not, indeed, said, that Congress shall have the exclusive power, but it is said that they shall have power to do a certain act, which, when done, shall be exclusive in its operation. The power to do such an act, must be an exclusive power. It can, in the nature of things, be performed only by a single hand. Is not the power of one sovereign to confer exclusive rights, on a given subject, within a certain territory, inconsistent with a power in another independent sovereign, to confer exclusive rights on the same subject, in the same territory? Do not the powers clash? The right to be conferred by Congress, is to exclude all other rights on the subject in the United States; New York being one of those States. The right to be conferred by New York, is to exclude all other rights on the subject within the State of New York. That one right may exclude another, is perfectly intelligible; but that two rights should reciprocally exclude each other, and yet both continue to subsist in perfect harmony, is inconceivable. Can a concurrent power exist, if, from the very nature of its action, it must take away, or render nugatory, the power given to Congress?
Supposing the power to be concurrent, Congress may secure the right for one period of time, and the respective States for another. Congress may secure it for the whole Union, and each State may secure it to a different claimant, for its own territory. Congress possesses the power of granting an exclusive right to authors and inventors, within the United States. New York claims the power to grant such exclusive right within that State. An author or inventor in that State, may take a grant for a period of time far longer than that allowed by the act of Congress. He may take a similar grant from every other State in the Union; and thus this pretended concurrent power supersedes, abrogates, and annuls the power of Congress. What would become of the power of Congress after the whole sphere of its action was taken away by this concurrent power of the States? Who would apply to the power of Congress for a patent or a copyright, while the States held up higher privileges? This concurrent legislation would degenerate into advertisements for custom. These powers would be in the market, and the highest bidder would take all.
Are not powers repugnant, when one may take from the other the whole territory on which alone it can act? Is not the repugnance such as to annihilate the power of Congress, as completely as if the whole Union was itself annihilated?
But suppose, for the sake of the argument, that the States have this concurrent power; yet it cannot be denied that, if the legislation of the State be repugnant to the laws of Congress, that of the State is void so far as the repugnance exists. In the present case the repugnance is manifest. The law of Congress declares that all inventors of useful improvements throughout the United States, shall be entitled to the exclusive right in their discoveries for fourteen years only. The law of New York declares, that this inventor shall be entitled to the exclusive use of his discovery for thirty years, and as much longer as the State shall permit. The law of Congress, by limiting the exclusive right to fourteen years, in effect declares that, after the expiration of that time, the discovery shall be the common right of the whole people of the United States. The law of New York declares that it shall not, after fourteen years, be the exclusive right of the people of the United States, but that it shall be the exclusive right of this inventor for thirty years, and for so much longer as she, in her sovereign will and pleasure, may permit. If this be not repugnance, direct and palpable, we must have a new vocabulary for the definition of the word.
But it was said that the appellant had no patent under the United States, and therefore, could not raise the question. To this it was answered, that it was not necessary that he should have a patent. The question as to the validity of the law of New York, is raised, whenever a right is asserted under that law, and is resisted by the party against whom it is asserted; and that validity is to be tested, not by comparing the law of New York with a patent, but by comparing it with the Constitution and laws of the United States.
It was also said that there could be no repugnance, because it was admitted that wherever a patent from the United States appears, the patent obtained under the State law must yield to it; that the patent under the State is valid only until the patent from the paramount power appears; and that the rights derived from the different sovereigns must be found practically to clash, before the law of New York was to give way for repugnancy. This is an insidious argument, and fraught with all the dangers which have been enumerated. To illustrate this, suppose a grant from Virginia, within Ohio, after she had ceded the whole territory to the United States; would the party in possession, even if a mere intruder, be bound to show a grant from the United States, before he could resist the unlawful grant of Virginia? But there the plaintiff would be claiming under a State which had previously ceded away the power to make such grants, which is precisely the case here, so that there need be no repugnance arising from patents. If a repugnance exist between the laws of New York and the Constitution and laws of the United States, any citizen of the United States has a right to act as if the law of New York were a nullity; and the question of its nullity and validity arises, wherever an attempt is made to enforce it.
If then the power of securing to authors and inventors the use of their writings and discoveries, be exclusively vested in Congress, the acts of New York are void, because they are founded on the exercise of the same power by the State. And if the power be concurrent, these acts are still void, because they interfere with the legislation of Congress on the same subject.
In conclusion, the Attorney-General observed, that his learned friend (Mr. Emmett) had eloquently personified the State of New York, casting her eyes over the ocean, witnessing everywhere this triumph of her genius and exclaiming in the language of Ćneas.
It is a momentous decision which this Court is called on to make. Here are three States almost on the eve of war. It is the high province of this Court to interpose its benign and mediatorial influence. The framers of our admirable Constitution would have deserved the wreath of immortality which they have acquired, had they done nothing else than to establish this guardian tribunal, to harmonize the jarring elements in our system.
But, sir, if you do not interpose your friendly hand, and extirpate the seeds of anarchy which New York has sown, you will have civil war. The war of legislation, which has already commenced, will, according to its usual course, become a war of blows. Your country will be shaken with civil strife. Your republican institutions will perish in the conflict. Your Constitution will fall. The last hope of nations will be gone.
And, what will be the effect upon the rest of the world? Look abroad at the scenes which are now passing on our globe, and judge of that effect. The friends of free government throughout the earth, who have been heretofore animated by our example, and have held it up before them as their polar star, to guide them through the stormy seas of revolution, will witness our fall with dismay and despair. The arm that is everywhere lifted in the cause of liberty, will drop, unnerved, by the warrior’s side. Despotism will have its day of triumph, and will accomplish the purpose at which it too certainly aims. It will cover the earth with the mantle of mourning.
Then, sir, when New York shall look upon this scene of ruin, if she have the generous feelings which I believe her to have, it will not be with her head aloft, in the pride of conscious triumph—“her rapt soul sitting in her eyes”; no, sir, no: dejected, with shame and confusion—drooping under the weight of her sorrow, with a voice suffocated with despair.
Mr. Chief Justice Marshall delivered the opinion of the Court.
The appellant contends that this decree is erroneous, because the laws which purport to give the exclusive privilege it sustains, are repugnant to the Constitution and laws of the United States.
They are said to be repugnant —
1st. To that clause in the Constitution which authorizes Congress to regulate commerce.
2d. To that which authorizes Congress to promote the progress of science and useful arts.
The State of New York maintains the constitutionality of these laws.
Since, however, in exercising the power of regulating their own purely internal affairs, whether of trading or police, the States may sometimes enact laws the validity of which depends on their interfering with and being contrary to an act of Congress passed in pursuance of the Constitution, the Court will enter upon the inquiry whether the laws of New York as expounded by the highest tribunal of that State have, in their application to this case, come into collision with an act of Congress and deprived a citizen of a right to which that act entitles him. Should this collision exist, it will be immaterial whether those laws were passed in virtue of a concurrent power “to regulate commerce with foreign nations and among the several States” or in virtue of a power to regulate their domestic trade and police. In one case and the other, the acts of New York must yield to the law of Congress; and the decision sustaining the privilege they confer, against a right given by a law of the Union, must be erroneous.
This opinion has been frequently expressed in this Court and is founded as well on the nature of the government as on the words of the Constitution. In argument, however, it has been contended that if a law passed by a State in the exercise of its acknowledged sovereignty, comes into conflict with a law passed by Congress in pursuance of the Constitution, they affect the subject and each other like equal opposing powers.
But the framers of our Constitution foresaw this state of things and provided for it, by declaring the supremacy not only of itself, but of the laws made in pursuance of it. The nullity of any act or law inconsistent with the Constitution is produced by the declaration that the Constitution is the supreme law. The appropriate application of that part of the clause which confers the same supremacy on laws and treaties is to such acts of the State Legislatures as do not transcend their powers, but, though enacted in the execution of acknowledged State powers, interfere with or are contrary to the laws of Congress made in pursuance of the Constitution or some treaty made under the authority of the United States. In every such case, the act of Congress, or the treaty, is supreme; and the law of the State, though enacted in the exercise of powers not controverted, must yield to it.
In pursuing this inquiry at the bar, it has been said that the Constitution does not confer the right of intercourse between State and State. That right derives its source from those laws whose authority is acknowledged by civilized man throughout the world. This is true. The Constitution found it an existing right, and gave to Congress the power to regulate it. In the exercise of this power, Congress has passed “an Act for enrolling or licensing ships or vessels to be employed in the coasting trade and fisheries, and for regulating the same.” The counsel for the respondent contend that this act does not give the right to sail from port to port, but confines itself to regulating a pre-existing right, so far only as to confer certain privileges on enrolled and licensed vessels in its exercise.
The word “license” means permission or authority; and a license to do any particular thing is a permission or authority to do that thing; and, if granted by a person having power to grant it, transfers to the grantee the right to do whatever it purports to authorize. It certainly transfers to him all the right which the grantor can transfer to do what is within the terms of the license.
The license must be understood to be what it purports to be, a legislative authority to the steamboat Bellona, “to be employed in carrying on the coasting trade, for one year from this date.” It has been denied that these words authorize a voyage from New Jersey to New York. It is true that no ports are specified; but it is equally true that the words used are perfectly intelligible and do confer such authority as unquestionably as if the ports had been mentioned. The coasting trade is a term well understood.
The real and sole question seems to be, whether a steam machine, in actual use, deprives a vessel of the privileges conferred by a license. Steam boats may be enrolled and licensed, in common with vessels using sails. They are, of course, entitled to the same privileges, and can no more be restrained from navigating waters, and entering ports which are free to such vessels, than if they were wafted on their voyage by the winds, instead of being propelled by the agency of fire. The one element may be as legitimately used as the other, for every commercial purpose authorized by the laws of the Union; and the act of a State inhibiting the use of either to any vessel having a license under the act of Congress, comes, we think, in direct collision with that act.
As this decides the cause, it is unnecessary to enter in an examination of that part of the Constitution which empowers Congress to promote the progress of science and the useful arts.
Powerful and ingenious minds, taking as postulates that the powers expressly granted to the government of the Union are to be contracted by construction into the narrowest possible compass and that the original powers of the States are retained if any possible construction will retain them may by a course of well digested, but refined and metaphysical reasoning founded on these premises, explain away the Constitution of our country and leave it a magnificent structure, indeed, to look at but totally unfit for use. They may so entangle and perplex the understanding as to obscure principles which were before thought quite plain, and induce doubts where if the mind were to pursue its own course none would be perceived. In such a case, it is peculiarly necessary to recur to safe and fundamental principles to sustain those principles.
Decree. This Court is of opinion that the several licenses to the steam boats the Stoudinger and the Bellona to carry on the coasting trade, which are set up by the appellant, Thomas Gibbons in his answer to the bill of the respondent, which were granted under an act of Congress, passed in pursuance of the Constitution of the United States, gave full authority to those vessels to navigate the waters of the United States, by steam or otherwise, for the purpose of carrying on the coasting trade—any law of the State of New York to the contrary notwithstanding. So much of the several laws of the State of New York as prohibits vessels, licensed according to the laws of the United States, from navigating the waters of the State of New York by means of fire or steam, is repugnant to the said Constitution and void. This Court is, therefore, of opinion that the decree of the court of New York which perpetually enjoins the said Thomas Gibbons from navigating the waters of the State of New York with the steam boats the Stoudinger and the Bellona, by steam or fire, is erroneous, and ought to be reversed, and the same is hereby reversed and annulled.
Mr. Justice Johnson.
The judgment entered by the Court in this cause, has my entire approbation; but having adopted my conclusions on views of the subject materially different from those of my brethren, I feel it incumbent on me to exhibit those views. I have, also, another inducement: in questions of great importance and great delicacy, I feel my duty to the public best discharged, by an effort to maintain my opinions in my own way.
In attempts to construe the Constitution, I have never found much benefit resulting from the inquiry whether the whole or any part of it is to be construed strictly or literally. The simple, classical, precise, yet comprehensive language in which it is couched leaves, at most, but very little latitude for construction; and when its intent and meaning is discovered nothing remains but to execute the will of those who made it in the best manner to effect the purposes intended.
. . . It is not material, in my view of the subject, to inquire whether the article a or the should be prefixed to the word “power.” Either, or neither, will produce the same result: if either, it is clear that the article the would be the proper one, since the next preceding grant of power is certainly exclusive, to wit: “to borrow money on the credit of the United States.” But mere verbal criticism I reject.
My opinion is founded on the application of the words of the grant to the subject of it. A right over the subject has never been pretended to in any instance, except as incidental to the exercise of some other unquestionable power. The present is an instance of the assertion of that kind, as incidental to a municipal power — that of superintending the internal concerns of a State, and particularly of extending protection and patronage, in the shape of a monopoly, to genius and enterprise.
The grant to Livingston and Fulton, interferes with the freedom of intercourse and on this principle its constitutionality is contested. When speaking of the power of Congress over navigation, I do not regard it as a power incidental to that of regulating commerce; I consider it as the thing itself; inseparable from it as vital motion is from vital existence.
It is impossible, with the views which I entertain of the principle on which the commercial privileges of the people of the United States rests, to concur in the view which this Court takes of the effect of the coasting license in this cause. I do not regard it as the foundation of the right set up in behalf of the appellant. If there was any one object riding over every other in the adoption of the Constitution, it was to keep the commercial intercourse among the States free from all invidious and partial restraints. And I cannot overcome the conviction that if the licensing act was repealed tomorrow, the rights of the appellant to a reversal of the decision complained of, would be as strong as it is under this license.
I have not touched upon the right of the States to grant patents for inventions or improvements, generally, because it does not necessarily arise in this cause. It is enough for all the purposes of this decision, if they cannot exercise it so as to restrain a free intercourse among the States.
1. Gibbons v. Ogden appears to be the first case involving preemption of state law by federal patent or copyright law. The submissions of counsel here raise virtually every good and bad argument on intellectual property preemption made ever since. Does the majority opinion shed more light on the issues than the arguments of counsel do?
The Court decided the case instead on the grounds that ship licensing legislation passed under the commerce clause preempted the New York law. Patent and copyright preemption of state law then faded from sight for the next century and a quarter or more. Then, Judge Learned Hand suggested it in his dissent in Capitol Records, which immediately follows, and the Supreme Court invoked it to decide Sears and Compco, which follow here after that.
2. The Attorney General argues here that the choice of Congress to set the term of a patent at 14 years (as it then was; later, 17 years; and now 20 years from filing) “in effect declares that, after the expiration of that time, the discovery shall be the common right of the whole people of the United States.”
Could it not be said that Congress simply said that 14 years of federal monopoly was all it wanted to offer, and that it was indifferent to what, if anything, States did in supplement? One might say that “the patent laws say nothing explicitly about the right to copy or the right to use, or any common right to do anything — they speak only in terms of granting patentees a federal right to exclude.” Can you answer that?
3. What is the difference between the respective thrusts of Johnson's concurrence and the majority opinion? What would be the effect of the rule suggested in the last sentence of Johnson's concurrence?
Capitol Records, Inc. v. Mercury Records Corp.
United States Court of Appeals
221 F.2d 657 (2d Cir. 1955)
Before L. Hand and Medina, Circuit Judges, and Dimock, District Judge. Dimock, District Judge.
Plaintiff obtained below an injunction against manufacture and distribution of phonograph records by defendant. The phonograph records bear recordings of performances by highly gifted artists of certain musical compositions. Since each party by stipulation disclaims ownership in any of the compositions by virtue of copyright, we treat them as in the public domain for the purposes of the case. Plaintiff derives its title, such as it is, from Telefunkenplatte, G.m.b.H. (“Telefunken”) in Germany, which purported to sell to plaintiff matrix records and to grant to plaintiff the right to manufacture and distribute copy records in the United States. Defendant derives its title, such as it is, from an alien property administration in Czechoslovakia which purported to grant to defendant’s predecessor in title the right to use identical matrix records and the right to manufacture therefrom, and distribute, copy records in the United States. Telefunken was the original owner of these matrix records which came from Czechoslovakia and had furnished them to an organization in that country giving it the right to reproduce and sell copies in a limited territory which did not include the United States.
The records have not been copyrighted. If they were subject to copyright we are clear that the rights of the parties to make and sell copies are to be determined under federal law. We must first determine, therefore, whether or not phonograph records of compositions in the public domain recorded by musical artists are susceptible of copyright.
There can be no doubt that, under the Constitution, Congress could give to one who performs a public domain musical composition the exclusive right to make and vend phonograph records of that rendition. The question is whether Congress has done so.
It is plain that prior to the 1909 amendment of the Copyright Act, Congress had not accorded to one who performed such a composition that exclusive right. Congress amended the Act in 1909 to extend copyright proprietors’ protection against infringement to phonograph recordings. But Congress provided no means for copyrighting a virtuoso’s rendition of a musical composition in the public domain. The intent of Congress appears from the Report of the Committee on Patents which accompanied the House of Representatives bill that embodied the amendment. That Report stated:
It is not the intention of the committee to extend the right of copyright to the mechanical reproductions themselves, but only to give the composer or copyright proprietor the control, in accordance with the provisions of the bill, of the manufacture and use of such devices.
It therefore appears, first, that Congress, before the 1909 amendment, intended that one who performed a public-domain musical composition should not be able to obtain copyright protection for a phonographic record thereof, and, second, that nothing in the 1909 amendment indicated any change in that intention.
Since the Copyright Act does not deal with the protection of phonograph records of the performances of public-domain compositions by virtuosos, we have no basis for applying federal law. We must apply the law which would have been applied in the courts of the state embracing the district of the court below. Erie R. Co. v. Tompkins, 304 U.S. 64 (1938). To decide the case before us we must resolve the competing claims of a plaintiff which derives its rights from a grant from Telefunken in Germany and a defendant which derives its rights from a grant from an alien property administration in Czechoslovakia. We must determine what law the New York State courts would apply to ascertain the extent of the respective rights of plaintiff and defendant. We find a complete dearth of authority on the question in New York and consequently must make the decision upon principle.
We believe that where the extent of literary property within a given jurisdiction is in question and that extent depends upon acts which have taken place outside of that jurisdiction, the determination should be made according to the law of that jurisdiction as though the acts had taken place within its borders.
Literary property is in essence a right to exclude, to a greater or lesser extent, others from making some or all use of the expressed thoughts of an author. The number of the conceivable grades of the extent of the exclusion and the number of the conceivable kinds of uses of the thoughts of authors are almost limitless. If we leave those questions of the scope of the right to any law other than that of the place where the right is sought to be exercised we may be faced with dealing with property interests unknown to our law.
We shall therefore determine the respective rights of plaintiff and defendant as though they had been created by the law of the State of New York. Telefunken, in Germany, purported to grant to defendant’s predecessor in title the right to make and vend the phonograph records in Czechoslovakia. Defendant’s predecessor proceeded to make and vend the phonograph records in Czechoslovakia. Telefunken, in Germany, likewise purported to grant to plaintiff the right to make and vend the phonograph records in the United States. Plaintiff likewise proceeded to make and vend the records in the United States. Defendant is making and vending the records in the United States.
Under the law of New York, the owner of literary property may, by a negative covenant, subject the use of literary property to restrictions in the hands of a remote assignee. Defendant cannot, therefore, claim rights to make and vend the records outside of Czechoslovakia.
Plaintiff must, however, succeed on the strength of its own title rather than the weakness of defendant’s. Did Telefunken’s grant vest any rights in plaintiff? The New York rule that literary property may be subjected to restrictions in the hands of a remote assignee presupposes the effectiveness of an assignment of literary property. Here both the assignment and the restriction to the United States were valid.
Granting that plaintiff was in the beginning vested with the right to make and vend the records in the United States, was that right lost as soon as plaintiff sold the first records? In RCA Mfg. Co. v. Whiteman, 2 Cir., 114 F.2d 86, this court stated that the common–law property in the performances of musical artists which had been recorded ended with the sale of the records and that thereafter anyone might copy them and use them as he pleased. If that is the law, plaintiff has no more right to demand that defendant cease its unauthorized making and vending than has the merest interloper.
Our conclusion is that the quoted statement from the RCA case is not the law of the State of New York. Since its decision the New York courts have had close contact with the question in Metropolitan Opera Ass’n v. Wagner-Nichols Recorder Corp., 279 App. Div. 632, 107 N.Y.S.2d 795. We believe that the inescapable result of that case is that, where the originator, or the assignee of the originator, of records of performances by musical artists puts those records on public sale, his act does not constitute a dedication of the right to copy and sell the records.
In the Metropolitan Opera case the Metropolitan Opera Association had purported to grant to the American Broadcasting Company the exclusive right to broadcast its performances, and to Columbia Records the exclusive right to make and vend records of its performances. Defendant, without obtaining any consent, made and sold records of the broadcasts. The court held that this constituted unfair competition and upheld a complaint seeking an injunction in favor of Metropolitan Opera and Columbia.
We thus conclude that plaintiff has not lost the exclusive right to make and sell the records in the United States.
L. Hand, Circuit Judge (dissenting).
I also believe that the performance or rendition of a “musical composition” is a “writing” under Art. I, § 8, Cl. 8, separate from, and additional to, the “composition” itself. It follows that Congress could grant the performer a copyright upon it, provided it was embodied in a physical form capable of being copied. The propriety of this appears, when we reflect that a musical score in ordinary notation does not determine the entire performance, certainly not when it is sung or played on a stringed or wind instrument. Musical notes are composed of a “fundamental note” with harmonics and overtones which do not appear on the score. There may indeed be instruments—e.g. percussive—which do not allow any latitude, though I doubt even that; but in the vast number of renditions, the performer has a wide choice, depending upon his gifts, and this makes his rendition pro tanto quite as original a “composition” as an “arrangement” or “adaptation” of the score itself, which the Act makes copyrightable. Now that it has become possible to capture these contributions of the individual performer upon a physical object that can be made to reproduce them, there should be no doubt that this is within the Copyright Clause of the Constitution.
That, however, does not answer the question whether Congress has protected this “common-law property” by copyright; and I am also disposed to believe that it has not done so. We in RCA Mfg. Co. v. Whiteman, 2 Cir., 114 F.2d 86, and the Supreme Court of Pennsylvania in Waring v. WDAS Broadcasting Station, Inc., 327 Pa. 433, 194 A. 631, said that records such as those at bar could not be copyrighted; although it is true that in neither case was that strictly necessary to the actual decision. The records of Telefunken, though they are “Writings” under the Constitution, could not have been copyrighted under the Act.
However, the question at bar is not whether the plaintiff can prevent the plagiarism of its records by the defendant as a copyright infringement; but whether by their public sale it has lost its “common-law property” in the renditions of the songs. It got from Telefunken all rights that Telefunken had in the matrices and records made in Germany, and I will assume that these included any rights that the singers may have had in the renditions. If the question is to be decided by the law of New York, where the records were sold, again I agree that the decision in Metropolitan Opera Ass’n v. Wagner-Nichols Recorder Corp. is conclusive upon us. In that case the intervening plaintiff, Columbia Records, had a contract with the opera company which allowed it to make recordings of three operas produced by that company and to sell the records so made to the public. The defendant made matrices from broadcasts of the operas by the American Broadcasting Company under another contract with the opera company. The defendant made and sold records from these matrices, which the court enjoined on the theory that the sales were “unfair competition.” If the records had been copyrightable under the Act, there could be no doubt that publication would have been a dedication of any common-law right. In Fashion Originators Guild v. FTC, 2 Cir., 114 F.2d 80, we held that this was true of “common-law property” in the designs for women’s dresses, which was within the Copyright Clause of the Constitution, because “publication of them was a surrender of all” the owner’s “common-law property in them.” It is true that when our order was affirmed by the Supreme Court, 312 U.S. 457, the opinion contained the following passage:
Nor can the unlawful combination be justified upon the argument that systematic copying of dress designs is itself tortious, or should now be declared so by us. In the first place, whether or not given conduct is tortious s a question of state law, under our decision in Erie R. Co. v. Tompkins, 304 U.S. 64. In the second place, even if copying were an acknowledged tort under the law of every state, that situation would not justify petitioners in combining together to regulate and restrain interstate commerce in violation of federal law.
This might indeed be read as holding that the state law should decide whether the “author” had lost his “common-law property” by “publication”; but that was not necessary to the decision, and in any event the Court did not have in mind the effect of the Copyright Clause or the Copyright Act.
I do not think that we should consider Fashion Originators Guild as a ruling that it is the state law that determines what “publication” destroys the “common-law property” in a “Writing” not copyrightable under the Act. We did not indeed have to say what law governed that question in either Fashion Originators Guild or RCA Mfg. Co. v. Whiteman, for we had no reason to anticipate that the law of New York would take a different view; and, for that matter, the decision in the Metropolitan Opera case itself was made without any notion that a federal question might be involved.
I therefore recognize the plausibility of the possible argument that the courts of New York should be deemed free, sub nomine “unfair competition,” to determine what conduct shall constitute a “publication” of a “work” not covered by the Copyright Act. It would then follow that they could grant to an author a perpetual monopoly, although he exploited the “work” with all the freedom he would have enjoyed, had it been copyrighted.
I cannot believe that the failure of Congress to include within the Act all that the Clause covers should give the states so wide a power. To do so would pro tanto defeat the overriding purpose of the Clause, which was to grant only for “limited Times” the untrammeled exploitation of an author’s “Writings.” Either he must be content with such circumscribed exploitation as does not constitute “publication,” or he must eventually dedicate his “work” to the public. The situation is no different from that of patents, where such bilateral character of the grant is a commonplace.
I would hold that the clause has that much effect ex proprio vigore; and that the states are not free to follow their own notions as to when an author’s right shall be unlimited both in user and in duration. Such power of course they have as to “works” that are not “Writings”; but I submit that, once it is settled that a “work” is in that class, the Clause enforces upon the author the choice I have just mentioned; and, if so, it must follow that it is a federal question whether he has published the “work.”
Moreover, there is another reason for this conclusion. Uniformity was one of the principal interests to be gained by devolving upon the Nation the regulation of this subject. During the existence of the Articles of Confederation several of the states had passed copyright laws, and in 1783 Madison had procured the passage of a resolution through Congress recommending the states to pass such a law. By 1786 all but Vermont had done so, although in several states the statute did not protect citizens of states that did not reciprocate; and so the matter stood in 1787.
So far as I know, there is nothing to show what took place in the Convention; but, in the 43rd number of The Federalist, Madison made this short comment on the Clause: “The States cannot separately make effectual provision for either of these cases [patents or copyrights] and most of them have anticipated the decision of this point, by laws passed at the instance of Congress.” He assumed that it was obvious that the states could not make any such “effectual provision,” and so it was; for, although a state may prohibit the importation of pirated “works” published elsewhere, and even confiscate them, that has again and again proved an ineffective protection; and was indeed a principal cause of international reciprocity by treaty.
If, for example in the case at bar, the defendant is forbidden to make and sell these records in New York, that will not prevent it from making and selling them in any other state which may regard the plaintiff’s sales as a “publication”; and it well be practically impossible to prevent their importation into New York. That is exactly the kind of evil at which the clause is directed. I recognize that under the view I take the plaintiff can have only a very limited use of its records, if it hopes to keep its monopoly. That is indeed a harsh limitation, since it cannot copyright them; but I am not satisfied that the result is unjust, when the alternative is a monopoly unlimited both in time and in user. Unhappily we cannot deal with the situation as we should like, because the copyrightability of such “works” is a casus omissus from the Act. That was almost certainly owing to the fact that in 1909 the practice of recording the renditions of virtuosi had not sprung up.
Therefore I would reverse.
1. The Capitol Records dissent is a prophesy of the modern doctrine of preemption by federal intellectual property law of state law protection of intellectual property rights. (So too, of course, is the Attorney General’s argument in Gibbons v. Ogden.)
For an analysis of Capitol Records that predates the Supreme Court’s entry into the field of intellectual property preemption, see Benjamin Kaplan, Performer’s Right and Copyright: The Capitol Records Case, 69 Harv. L. Rev. 409 (1956); see also Kalodner and Vance, The Relation Between Federal and State Protection of Literary and Artistic Property, 72 Harv. L. Rev. 1079 (1959).
2. Until Erie Railway Co. v. Tompkins, 304 U.S. 64 (1937), such preemption was not a significant issue. Why? See Judge Hand’s remark — “We did not indeed have to say what law governed that question in either Fashion Originators Guild or RCA Mfg. Co. v. Whiteman, for we had no reason to anticipate that the law of New York would take a different view.”
3. According to Judge Dimock, in 1909 Congress decided to make phonograph records infringing “copies” of copyrighted music, to protect composers of music and their assignees. (This overturned White-Smith Music Pub. Co. v. Apollo Co., 209 U.S. 1 (1908).) But Congress did not at that time create (although it could have done so had it so desired), for the benefit of the virtuosos and other musicians who performed the music recorded on phonograph records, any intellectual property rights in their performances. Judge Dimock thought that left the matter to state law: “Since the Copyright Act does not deal with the protection of phonograph records of the performances of public-domain compositions by virtuosos, we have no basis for applying federal law.” What did Judge Hand think? On what grounds?
4. Under federal copyright law as it stood until the 1976 Act, unpublished works were protected under state, “common–law copyright,” while published works could be protected only under federal copyright. Publication divested or dedicated common–law copyright. Since the 1976 Act, however, both published works and unpublished works are protected by federal copyright law.
What is the significance and consequence of allowing state law to define what constitutes publication, for purposes of divesting common–law copyright?
Sears, Roebuck & Co. v. Stiffel Co.
United States Supreme Court
376 U.S. 225 (1964)
Mr. Justice Black delivered the opinion of the Court.
The question in this case is whether a State’s unfair competition law can, consistently with the federal patent laws, impose liability for or prohibit the copying of an article which is protected by neither a federal patent nor a copyright. The respondent, Stiffel Company, secured design and mechanical patents on a “pole lamp” — a vertical tube having lamp fixtures along the outside, the tube being made so that it will stand upright between the floor and ceiling of a room. Pole lamps proved a decided commercial success, and soon after Stiffel brought them on the market Sears, Roebuck & Company put on the market a substantially identical lamp, which it sold more cheaply, Sears’ retail price being about the same as Stiffel’s wholesale price.
Stiffel then brought this action against Sears in the United States District Court for the Northern District of Illinois, claiming in its first count that by copying its design Sears had infringed Stiffel’s patents and in its second count that by selling copies of Stiffel’s lamp Sears had caused confusion in the trade as to the source of the lamps and had thereby engaged in unfair competition under Illinois law. There was evidence that identifying tags were not attached to the Sears lamps although labels appeared on the cartons in which they were delivered to customers, that customers had asked Stiffel whether its lamps differed from Sears’, and that in two cases customers who had bought Stiffel lamps had complained to Stiffel on learning that Sears was selling substantially identical lamps at a much lower price.
The district court, after holding the patents invalid for want of invention (a decision from which Stiffel took no appeal) went on to find as a fact that Sears’ lamp was “a substantially exact copy” of Stiffel’s and that the two lamps were so much alike, both in appearance and in functional details, “that confusion between them is likely, and some confusion has already occurred.” On these findings the court held Sears guilty of unfair competition, enjoined Sears “from unfairly competing with Stiffel by selling or attempting to sell pole lamps identical to or confusingly similar to” Stiffel’s lamp, and ordered an accounting to fix profits and damages resulting from Sears’ “unfair competition.”
The court of appeals affirmed. That court held that, to make out a case of unfair competition under Illinois law, there was no need to show that Sears had been “palming off” its lamps as Stiffel lamps; Stiffel had only to prove that there was a “likelihood of confusion as to the source of the products” — that the two articles were sufficiently identical that customers could not tell who had made a particular one. Impressed by the “remarkable sameness of appearance” of the lamps, the court of appeals upheld the trial court’s findings of likelihood of confusion and some actual confusion, findings which the appellate court construed to mean confusion “as to the source of the lamps.” The court of appeals thought this enough under Illinois law to sustain the trial court’s holding of unfair competition, and thus held Sears liable under Illinois law for doing no more than copying and marketing an unpatented article. We granted certiorari to consider whether this use of a State’s law of unfair competition is compatible with the federal patent law.
Before the Constitution was adopted, some States had granted patents either by special act or by general statute, but when the Constitution was adopted provision for a federal patent law was made one of the enumerated powers of Congress because, as Madison put it in The Federalist No. 43, the States “cannot separately make effectual provision” for either patents or copyrights. That constitutional provision is Art. I, Sec. 8, cl. 8, which empowers Congress “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Pursuant to this constitutional authority, Congress in 1790 enacted the first federal patent and copyright law, and ever since that time has fixed the condition upon which patents and copyrights shall be granted. These laws, like other laws of the United States enacted pursuant to constitutional authority, are the supreme law of the land. When state law touches upon the area of these federal statutes, it is “familiar doctrine” that the federal policy “may not be set at naught, or its benefits denied” by the state law. This is true, of course, even if the state law is enacted in the exercise of otherwise undoubted state power.
The grant of a patent is the grant of a statutory monopoly; indeed, the grant of patents in England was an explicit exception to the statute of James I prohibiting monopolies.* Patents are not given as favors, as was the case of monopolies given by the Tudor monarchs, see The Case of Monopolies (Darcy v. Allein), 11 Co. Rep. 84b, 77 Eng. Rep. 1260 (K.B. 1602), but are meant to encourage invention by rewarding the inventor with the right, limited to a term of years fixed by the patent, to exclude others from the use of his invention. During that period of time no one may make use, or sell the patented product without the patentee’s authority.
* The Statute of Monopolies, 21 Jac. I, c. 3 (1623), declared all monopolies “contrary to the Laws of this Realm” and “utterly void and of none Effect.” Section VI, however, excepted patents of 14 years to “the true and first Inventor and Inventors” of “new Manufacturers” so long as they were “not contrary to the Law, nor mischievous to the State, by raising Prices of Commodities at home, or Hurt of Trade, or generally inconvenient.” Much American patent law derives from English patent law.
But in rewarding useful invention, the rights and welfare of the community must be fairly dealt with and effectually guarded. To that end the prerequisites to obtaining a patent are strictly observed, and when the patent has issued the limitations on its exercise are equally strictly enforced. To begin with, a genuine “invention” or “discovery” must be demonstrated lest in the constant demand for new appliances the heavy hand of tribute be laid on each slight technological advance in an art. Once the patent issues, it is strictly construed. It cannot be used to secure any monopoly beyond that contained in the patent, the patentee’s control over the product when it leaves his hands is sharply limited, and the patent monopoly may not be used in disregard of the antitrust laws. Finally, and especially relevant here, when the patent expires the monopoly created by it expires, too, and the right to make the article — including the right to make it in precisely the shape it carried when patented — passes to the public.
Thus the patent system is one in which uniform federal standards are carefully used to promote invention while at the same time preserving free competition. Obviously a State could not, consistently with the Supremacy Clause of the Constitution, extend the life of a patent beyond its expiration date or give a patent on an article which lacked the level of invention required for federal patents. To do either would run counter to the policy of Congress of granting patents only to true inventions, and then only for a limited time. Just as a State cannot encroach upon the federal patent laws directly, it cannot, under some other law, such as that forbidding unfair competition, give protection of a kind that clashes with the objectives of the federal patent laws.
In the present case the “pole lamp” sold by Stiffel has been held not to be entitled to the protection of either a mechanical or a design patent. An unpatentable article, like an article on which the patent has expired, is in the public domain and may be made and sold by whoever chooses to do so. What Sears did was to copy Stiffel’s design and to sell lamps almost identical to those sold by Stiffel. This it had every right to do under the federal patent laws. That Stiffel originated the pole lamp and made it popular is immaterial. “Sharing in the goodwill of an article unprotected by patent or trade-mark is the exercise of a right possessed by all—and in the free exercise of which the consuming public is deeply interested.” To allow a State by use of its law of unfair competition to prevent the copying of an article which represents too slight an advance to be patented would be to permit the State to block off from the public something which federal law has said belongs to the public. The result would be that while federal law grants only 14 or 17 years of protection to genuine inventions, States could allow perpetual protection to articles too lacking in novelty to merit any patent at all under federal constitutional standards. This would be too great an encroachment on the federal patent system to be tolerated.
Sears has been held liable here for unfair competition because of a finding of likelihood of confusion based only on the fact that Sears’ lamp was copied from Stiffel’s unpatented lamp and that consequently the two looked exactly alike. Of course there could be “confusion” as to who had manufactured these nearly identical articles. But mere inability of the public to tell two identical articles apart is not enough to support an injunction against copying or an award of damages for copying that which the federal patent laws permit to be copied. Doubtless a State may, in appropriate circumstances, require that goods, whether patented or unpatented, be labeled or that other precautionary steps be taken to prevent customers from being misled as to the source, just as it may protect businesses in the use of their trademarks, labels, or distinctive dress in the packaging of goods so as to prevent others, by imitating such markings, from misleading purchasers as to the source of the goods.
But because of the federal patent laws a State may not, when the article is unpatented and uncopyrighted, prohibit the copying of the article itself or award damages for such copying. The judgment below did both and in so doing gave Stiffel the equivalent of a patent monopoly on its unpatented lamp. That was error, and Sears is entitled to a judgment in its favor. Reversed.
Compco Corp. v. Day-Brite Lighting, Inc.
United States Supreme Court
376 U.S. 234 (1964)
Mr. Justice Black delivered the opinion of the Court.
As in Sears, Roebuck & Co. v. Stiffel Co., the question here is whether the use of a state unfair competition law to give relief against the copying of an unpatented industrial design conflicts with the federal patent laws. Both Compco and Day-Brite are manufacturers of fluorescent lighting fixtures of a kind widely used in offices and stores. Day-Brite in 1955 secured from the Patent Office a design patent on a reflector having cross-ribs claimed to give both strength and attractiveness to the fixture. Day-Brite also sought, but was refused, a mechanical patent on the same device.
After Day-Brite had begun selling its fixture, Compco’s predecessor began making and selling fixtures very similar to Day-Brite’s. This action was then brought by Day-Brite. One count alleged that Compco had infringed Day-Brite’s design patent; a second count charged that the public and the trade had come to associate this particular design with Day-Brite, that Compco had copied Day-Brite’s distinctive design so as to confuse and deceive purchasers into thinking Compco’s fixtures were actually Day-Brite’s, and that by doing this Compco had unfairly competed with Day-Brite. The complaint prayed for both an accounting and an injunction.
The District Court held the design patent invalid; but as to the second count, while the court did not find that Compco had engaged in any deceptive or fraudulent practices, it did hold that Compco had been guilty of unfair competition under Illinois law. The court found that the overall appearance of Compco’s fixture was “the same, to the eye of the ordinary observer, as the overall appearance” of Day-Brite’s reflector, which embodied the design of the invalidated patent; that the appearance of Day-Brite’s design had “the capacity to identify [Day-Brite] in the trade and does in fact so identify [it] to the trade”; that the concurrent sale of the two products was “likely to cause confusion in the trade”; and that “actual confusion has occurred.”
On these findings the court adjudged Compco guilty of unfair competition in the sale of its fixtures, ordered Compco to account to Day-Brite for damages, and enjoined Compco “from unfairly competing with plaintiff by the sale or attempted sale of reflectors identical to, or confusingly similar to” those made by Day-Brite. The Court of Appeals held there was substantial evidence in the record to support the District Court’s finding of likely confusion and that this finding was sufficient to support a holding of unfair competition under Illinois law.
Although the District Court had not made such a finding, the appellate court observed that “several choices of ribbing were apparently available to meet the functional needs of the product,” yet Compco “chose precisely the same design used by the plaintiff and followed it so closely as to make confusion likely.” A design which identifies its maker to the trade, the Court of Appeals held, is a “protectable” right under Illinois law, even though the design is unpatentable.
To support its findings of likelihood of confusion and actual confusion, the trial court was able to refer to only one circumstance in the record. A plant manager who had installed some of Compco’s fixtures later asked Day-Brite to service the fixtures, thinking they had been made by Day-Brite. There was no testimony given by a purchaser or by anyone else that any customer had ever been misled, deceived, or “confused,” that is, that anyone had ever bought a Compco fixture thinking it was a Day-Brite fixture.
All the record shows, as to the one instance cited by the trial court, is that both Compco and Day-Brite fixtures had been installed in the same plant, that three years later some repairs were needed, and that the manager viewing the Compco fixtures — hung at least 15 feet above the floor and arranged end to end in a continuous line so that identifying marks were hidden — thought they were Day-Brite fixtures and asked Day-Brite to service them. Not only is this incident suggestive only of confusion after a purchase had been made, but also there is considerable evidence of the care taken by Compco to prevent customer confusion, including clearly labeling both the fixtures and the containers in which they were shipped and not selling through manufacturers’ representatives who handled competing lines.
Notwithstanding the thinness of the evidence to support findings of likely and actual confusion among purchasers, we do not find it necessary in this case to determine whether there is “clear error” in these findings. They, like those in Sears, Roebuck & Co. v. Stiffel Co., were based wholly on the fact that selling an article which is an exact copy of another unpatented article is likely to produce and did in this case produce confusion as to the source of the article. Even accepting the findings, we hold that the order for an accounting for damages and the injunction are in conflict with the federal patent laws. Today we have held in Sears, Roebuck & Co. v. Stiffel Co. that when an article is unprotected by a patent or a copyright, state law may not forbid others to copy that article. To forbid copying would interfere with the federal policy, found in Art. I, § 8, cl. 8, of the Constitution and in the implementing federal statutes, of allowing free access to copy whatever the federal patent and copyright laws leave in the public domain. Here Day-Brite’s fixture has been held not to be entitled to a design or mechanical patent. Under the federal patent laws it is, therefore, in the public domain and can be copied in every detail by whoever pleases. It is true that the trial court found that the configuration of Day-Brite’s fixture identified Day–Brite to the trade because the arrangement of the ribbing had, like a trademark, acquired a “secondary meaning” by which that particular design was associated with Day–Brite. But if the design is not entitled to a design patent or other federal statutory protection, then it can be copied at will.
As we have said in Sears, while the federal patent laws prevent a State from prohibiting the copying and selling of unpatented articles, they do not stand in the way of state law, statutory or decisional, which requires those who make and sell copies to take precautions to identify their products as their own. A State of course has power to impose liability upon those who, knowing that the public is relying upon an original manufacturer’s reputation for quality and integrity, deceive the public by palming off their copies as the original. That an article copied from an unpatented article could be made in some other way, that the design is “nonfunctional” and not essential to the use of either article, that the configuration of the article copied may have a “secondary meaning” which identifies the maker to the trade, or that there may be “confusion” among purchasers as to which article is which or as to who is the maker, may be relevant evidence in applying a State’s law requiring such precautions as labeling; however, and regardless of the copier’s motives, neither these facts nor any others can furnish a basis for imposing liability for or prohibiting the actual acts of copying and selling. Cf. Kellogg Co. v. National Biscuit Co., 305 U.S. 111, 120 (1938). And of course a State cannot hold a copier accountable in damages for failure to label or otherwise to identify his goods unless his failure is in violation of valid state statutory or decisional law requiring the copier to label or take other precautions to prevent confusion of customers as to the source of the goods.
Since the judgment below forbids the sale of a copy of an unpatented article and orders an accounting for damages for such copying, it cannot stand. Reversed.
1. Which of the themes from the arguments of the Attorney General, circa 1824, and Judge Hand, circa 1955, do you recognize in Sears and Compco?
2. Is the preemption holding in Sears and Compco based on the patent statute or on the patent clause? Is there any difference in consequence?
3. If Capitol Records were decided after, instead of before, Sears and Compco how would that affect the outcome?
4. Do the Court’s reasons for holding state laws protecting product configurations preempted in Sears and Compco apply with equal force to state laws protecting information?
That is, are state quasi-copyright laws on the same legal footing as state quasi-patent laws? Do different kinds of quasi-property rights invoke different principles or quasi-principles?
5. Product configurations may be functional or non-functional. For example, Compco’s fixture had a “reflector having cross-ribs claimed to give both strength and attractiveness to the fixture,” which (if so) was functional. On the other hand, putting racing stripes on the side of a battery may have no functionality at all. A product feature may even be descriptive, as in the case of conventional but arbitrary colors for some products (brown for cola flavor soda, yellow–green for light–duty liquid detergents) or some product shapes. A product configuration, whether functional or non–functional, whether descriptive or non–descriptive, may come to be associated in the mind of the public with a particular source. This characteristic is termed “secondary meaning.”
a. How do these factors apply to screen displays?
b. What do Sears and Compco do to state laws protecting product configurations having various combinations of these parameters?
c. Does a copier’s intent to imitate an established seller’s product configuration, in order to deceive customers as to the source of the goods and thus divert their trade, make any difference?
6. What is the impact of Sears and Compco on the provisions of § 43(a) of the Lanham Trademark Act, 15 U.S.C. § 1125(a), which protect proprietors of product configurations against confusing use by others?
Lear, Inc. v. Adkins
United States Supreme Court
395 U.S. 653 (1969)
Mr. Justice Harlan delivered the opinion of the Court.
In 1952, John Adkins, an inventor and mechanical engineer, was hired by Lear, Inc., for the purpose of solving a vexing problem the company had encountered in its efforts to develop a gyroscope which would meet the increasingly demanding requirements of the aviation industry. The gyroscope is an essential component of the navigational system in all aircraft, enabling the pilot to learn the direction and altitude of his airplane. With the development of the faster airplanes of the 1950’s, more accurate gyroscopes were needed, and the gyro industry consequently was casting about for new techniques which would satisfy this need in an economical fashion. Shortly after Adkins was hired, he developed a method of construction at the company’s California facilities which improved gyroscope accuracy at a low cost. Lear almost immediately incorporated Adkins’ improvements into its production process to its substantial advantage.
The question that remains unsettled in this case, after eight years of litigation in the California courts, is whether Adkins will receive compensation for Lear’s use of those improvements which the inventor has subsequently patented. At every stage of this lawsuit, Lear has sought to prove that, despite the grant of a patent by the Patent Office, none of Adkins’ improvements were sufficiently novel to warrant the award of a monopoly under the standards delineated in the governing federal statutes. Moreover, the company has sought to prove that Adkins obtained his patent by means of a fraud on the Patent Office. In response, the inventor has argued that since Lear had entered into a licensing agreement with Adkins, it was obliged to pay the agreed royalties regardless of the validity of the underlying patent.
The Supreme Court of California unanimously vindicated the inventor’s position. While the court recognized that generally a manufacturer is free to challenge the validity of an inventor’s patent, it held:
One of the oldest doctrines in the field of patent law establishes that so long as a licensee is operating under a license agreement he is estopped to deny the validity of his licensor’s patent in a suit for royalties under the agreement. The theory underlying this doctrine is that a licensee should not be permitted to enjoy the benefit afforded by the agreement while simultaneously urging that the patent which forms the basis of the agreement is void.
Almost 20 years ago, in its last consideration of the doctrine, this Court also invoked an estoppel to deny a licensee the right to prove that his licensor was demanding royalties for the use of an idea which was in reality a part of the public domain. Automatic Radio Manufacturing Co. v. Hazeltine Research, Inc., 339 U.S. 827, 836 (1950). We granted certiorari in the present case, 391 U.S. 912, 88 S.Ct. 1810, 20 L.Ed.2d 651, to reconsider the validity of the Hazeltine rule in the light of our recent decisions emphasizing the strong federal policy favoring free competition in ideas which do not merit patent protection. Sears v. Stiffel; Compco v. Day-Brite.
At the very beginning of the parties’ relationship, Lear and Adkins entered into a rudimentary one-page agreement which provided that, although “all new ideas, discoveries, inventions, etc., vertical gyros become the property of Mr. John S. Adkins,” the inventor promised to grant Lear a license as to all ideas he might develop “on a mutually satisfactory royalty basis.” As soon as Adkins’ labors yielded tangible results, it quickly became apparent to the inventor that further steps should be taken to place his rights to his ideas on a firmer basis. In 1954 Adkins filed an application with the Patent Office in an effort to gain federal protection for his improvements. At about the same time, he entered into a lengthy period of negotiations with Lear in an effort to conclude a licensing agreement which would clearly establish the amount of royalties that would be paid.
The parties approved a complex 17-page contract which carefully delineated the conditions upon which Lear promised to pay royalties for Adkins’ improvements. The parties agreed that if—
the U.S. Patent Office refuses to issue a patent on the substantial claims contained in Adkins’ original patent application or if such a patent so issued is subsequently held invalid, then in any of such events Lear at its option shall have the right forthwith to terminate the specific license so affected or to terminate this entire Agreement.
As the contractual language indicates, Adkins had not obtained a final Patent Office decision as to the patentability of his invention at the time the licensing agreement was concluded. Indeed, he was not to receive a patent until 1960.
The progress of Adkins’ effort to obtain a patent followed the typical pattern. In his initial application, the inventor made the ambitious claim that his entire method of constructing gyroscopes was sufficiently novel to merit protection. The Patent Office, however, rejected this initial claim, as well as two subsequent amendments, which progressively narrowed the scope of the invention sought to be protected. Finally, Adkins narrowed his claim drastically to assert only that the design of the apparatus used to achieve gyroscope accuracy was novel. In response, the Office issued its 1960 patent, granting a 17-year monopoly on this more modest claim.
During the long period in which Adkins was attempting to convince the Patent Office of the novelty of his ideas, however, Lear had become convinced that Adkins would never receive a patent on his invention and that it should not continue to pay substantial royalties on ideas which had not contributed substantially to the development of the art of gyroscopy. In 1957, after Adkins’ patent application had been rejected twice, Lear announced that it had searched the Patent Office’s files and had found a patent which it believed had fully anticipated Adkins’ discovery. As a result, the company stated that it would no longer pay royalties on the large number of gyroscopes it was producing at its plant in Michigan (the Michigan gyros). Payments were continued on the smaller number of gyros produced at the company’s California plant (the California gyros) for two more years until they too were terminated in 1959.
As soon as Adkins obtained his patent in 1960, he brought this lawsuit in the California Superior Court. He argued to a jury that both the Michigan and the California gyros incorporated his patented apparatus and that Lear’s failure to pay royalties on these gyros was a breach both of the 1955 contract and of Lear’s quasi-contractual obligations. Although Lear sought to raise patent invalidity as a defense, the trial judge directed a verdict of $16,000 for Adkins on the California gyros, holding that Lear was estopped by its licensing agreement from questioning the inventor’s patent. The trial judge took a different approach when it came to considering the Michigan gyros. Noting that the company claimed that it had developed its Michigan designs independently of Adkins’ ideas, the court instructed the jury to award the inventor recovery only if it was satisfied that Adkins’ invention was novel, within the meaning of the federal patent laws. When the jury returned a verdict for Adkins of $888,000 on the Michigan gyros, the trial judge granted Lear’s motion for judgment notwithstanding the verdict, finding that Adkins’ invention had been completely anticipated by the prior art.
Neither side was satisfied with this split decision, and both appealed. The California Supreme Court took another approach to the problem presented. The court concluded that the doctrine of estoppel barred Lear from questioning the propriety of the Patent Office’s grant. The court’s adherence to estoppel, however, was not without qualification. After noting Lear’s claim that it had developed its Michigan gyros independently, the court tested this contention by considering “whether what is being built by Lear in Michigan springs entirely” from the prior art. Applying this test, it found that Lear had in fact “utilized the apparatus patented by Adkins throughout the period in question” and reinstated the jury’s $888,000 verdict on this branch of the case.
II. Estoppel Doctrine
Since the California Supreme Court’s construction of the 1955 licensing agreement is solely a matter of state law, the only issue open to us is raised by the court’s reliance upon the doctrine of estoppel to bar Lear from proving that Adkins’ ideas were dedicated to the common welfare by federal law. In considering the propriety of the State Court’s decision, we are well aware that we are not writing upon a clean slate. The doctrine of estoppel has been considered by this Court in a line of cases reaching back into the middle of the 19th century. Before deciding what the role of estoppel should be in the present case and in the future, it is, then, desirable to consider the role it has played in the past.
While the roots of the doctrine have often been celebrated in tradition, we have found only one 19th century case in this Court that invoked estoppel in a considered manner. And that case was decided in 1856 before the Sherman Act made it clear that the grant of monopoly power to a patent owner constituted a limited exception to the general federal policy favoring free competition.
In 1892 this Court found the doctrine of patent estoppel so inequitable that it refused to grant an injunction to enforce a licensee’s promise never to contest the validity of the underlying patent. “It is as important to the public that competition should not be repressed by worthless patents, as that the patentee of a really valuable invention should be protected in his monopoly.” Pope Manufacturing Co. v. Gormully, 144 U.S. 224, 234 (1892).
Although this Court invoked an estoppel in 1905 without citing or considering Pope’s powerful argument, the doctrine was not to be applied again in this Court until it was revived in Hazeltine, supra, which declared, without prolonged analysis, that licensee estoppel was “the general rule.” In so holding, the majority ignored the teachings of a series of decisions this Court had rendered during the preceding years. During this period, each time a patentee sought to rely upon his estoppel privilege before this Court, the majority created a new exception to permit judicial scrutiny into the validity of the Patent Office’s grant. Long before Hazeltine was decided, the estoppel doctrine had been so eroded that it could no longer be considered the “general rule,” but was only to be invoked in an ever-narrowing set of circumstances.
The estoppel rule was first stringently limited in a situation in which the patentee’s equities were far more compelling than those presented in the typical licensing arrangement. Westinghouse Elec. & Mfg. Co. v. Formica Insulation Co., 266 U.S. 342 (1924), framed a rule to govern the recurring problem which arises when the original patent owner, after assigning his patent to another for a substantial sum, claims that the patent is worthless because it contains no new ideas. The courts of appeals had traditionally refused to permit such a defense to an infringement action on the ground that it was improper both to “sell and keep the same thing.”
Nevertheless, Formica imposed a limitation upon estoppel which was radically inconsistent with the premises upon which the “general rule” is based. The Court held that while an assignor may not directly attack the validity of a patent by reference to the prior state of the art, he could introduce such evidence to narrow the claims made in the patent: “The distinction may be a nice one but seems to be workable.”
Workable or not, the result proved to be an anomaly: if a patent had some novelty Formica permitted the old owner to defend an infringement action by showing that the invention’s novel aspects did not extend to the inclusion of the old owner’s products; on the other hand, if a patent had no novelty at all, the old owner could not defend successfully since he would be obliged to launch the direct attack on the patent that Formica seemed to forbid.
The incongruity of this position compelled at least one court of appeals to carry the reasoning of the Formica exception to its logical conclusion. In 1940 the Seventh Circuit held that a licensee could introduce evidence of the prior art to show that the licensor’s claims were not novel at all and thus successfully defend an action for royalties.
In Scott Paper Co. v. Marcalus Mfg. Co., 326 U.S. 249 (1945), this Court adopted a position similar to the Seventh Circuit’s, undermining the basis of patent estoppel even more than Formica had done. In Scott, the original patent owner had attempted to defend an infringement suit brought by his assignee by proving that his product was a copy of an expired patent. The Court refused to permit the assignee to invoke an estoppel, finding that the policy of the patent laws would be frustrated if a manufacturer was required to pay for the use of information which under the patent statutes, was the property of all. Chief Justice Stone, for the Court, did not go beyond the precise question presented by a manufacturer who asserted that he was simply copying an expired patent.
Nevertheless it was impossible to limit the Scott doctrine to such a narrow compass. If patent policy forbids estoppel when the old owner attempts to show that he did no more than copy an expired patent, why should not the old owner also be permitted to show that the invention lacked novelty because it could be found in a technical journal or because it was obvious to one knowledgeable in the art? As Justice Frankfurter’s dissent indicated, there were no satisfactory answers to these questions. The Scott exception had undermined the very basis of the “general rule.”
The uncertain status of licensee estoppel in the case law is a product of judicial efforts to accommodate the competing demands of the common law of contracts and the federal law of patents. On the one hand, the law of contracts forbids a purchaser to repudiate his promises simply because he later becomes dissatisfied with the bargain he has made. On the other hand, federal law requires that all ideas in general circulation be dedicated to the common good unless they are protected by a valid patent. Sears, Roebuck v. Stiffel; Compco v. Day-Brite. When faced with this basic conflict in policy, both this Court and courts throughout the land have naturally sought to develop an intermediate position which somehow would remain responsive to the radically different concerns of the two different worlds of contract and patent. The result has been a failure. Rather than creative compromise, there has been a chaos of conflicting case law, proceeding on inconsistent premises. Before renewing the search for an acceptable middle ground, we must reconsider on their own merits the arguments which may properly be advanced on both sides of the estoppel question.
It will simplify matters greatly if we first consider the most typical situation in which patent licenses are negotiated. In contrast to the present case, most manufacturers obtain a license after a patent has issued. Since the Patent Office makes an inventor’s ideas public when it issues its grant of a limited monopoly, a potential licensee has access to the inventor’s ideas even if he does not enter into an agreement with the patent owner. Consequently, a manufacturer gains only two benefits if he chooses to enter a licensing agreement after the patent has issued.
First, by accepting a license and paying royalties for a time, the licensee may have avoided the necessity of defending an expensive infringement action during the period when he may be least able to afford one. Second, the existence of an unchallenged patent may deter others from attempting to compete with the licensee.
Under ordinary contract principles the mere fact that some benefit is received is enough to require the enforcement of the contract, regardless of the validity of the underlying patent. Nevertheless, if one tests this result by the standard of good-faith commercial dealing, it seems far from satisfactory. For the simple contract approach entirely ignores the position of the licensor who is seeking to invoke the court’s assistance on his behalf. Consider, for example, the equities of the licensor who has obtained his patent through a fraud on the Patent Office. It is difficult to perceive why good faith requires that courts should permit him to recover royalties despite his licensee’s attempts to show that the patent is invalid.
Even in the more typical cases, not involving conscious wrongdoing, the licensor’s equities are far from compelling. A patent, in the last analysis, simply represents a legal conclusion reached by the Patent Office. Moreover, the legal conclusion is predicated on factors as to which reasonable men can differ widely. Yet the Patent Office is often obliged to reach its decision in an ex parte proceeding, without the aid of the arguments which could be advanced by parties interested in proving patent invalidity. Consequently, it does not seem to us to be unfair to require a patentee to defend the Patent Office’s judgment when his licensee places the question in issue, especially since the licensor’s case is buttressed by the presumption of validity which attaches to his patent. Thus, although licensee estoppel may be consistent with the letter of contractual doctrine, we cannot say that it is compelled by the spirit of contract law, which seeks to balance the claims of promisor and promisee in accord with the requirements of good faith.
Surely the equities of the licensor do not weigh very heavily when they are balanced against the important public interest in permitting full and free competition in the use of ideas which are in reality a part of the public domain. Licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor’s discovery. If they are muzzled, the public may continually be required to pay tribute to would-be monopolists without need or justification. We think it plain that the technical requirements of contract doctrine must give way before the demands of the public interest in the typical situation involving the negotiation of a license after a patent has issued.
We are satisfied that Hazeltine should no longer be regarded as sound law with respect to its “estoppel” holding, and that holding is now overruled.
The case before us, however, presents a far more complicated estoppel problem than the one which arises in the most common licensing context. The problem arises out of the fact that Lear obtained its license in 1955, more than four years before Adkins received his 1960 patent. Indeed, from the very outset of the relationship, Lear obtained special access to Adkins’ ideas in return for its promise to pay satisfactory compensation.
Thus, during the lengthy period in which Adkins was attempting to obtain a patent, Lear gained an important benefit not generally obtained by the typical licensee. For until a patent issues, a potential licensee may not learn his licensor’s ideas simply by requesting the information from the Patent Office. During the time the inventor is seeking patent protection, the governing federal statute requires the Patent Office to hold an inventor’s patent application in confidence. If a potential licensee hopes to use the ideas contained in a secret patent application, he must deal with the inventor himself, unless the inventor chooses to publicize his ideas to the world at large. By promising to pay Adkins royalties from the very outset of their relationship, Lear gained immediate access to ideas which it may well not have learned until the Patent Office published the details of Adkins’ invention in 1960. At the core of this case, then, is the difficult question whether federal patent policy bars a State from enforcing a contract regulating access to an unpatented secret idea.
Adkins takes an extreme position on this question. The inventor does not merely argue that since Lear obtained privileged access to his ideas before 1960, the company should be required to pay royalties accruing before 1960 regardless of the validity of the patent which ultimately issued. He also argues that since Lear obtained special benefits before 1960, it should also pay royalties during the entire patent period (1960–1977), without regard to the validity of the Patent Office’s grant. We cannot accept so broad an argument.
Adkins’ position would permit inventors to negotiate all important licenses during the lengthy period while their applications were still pending at the Patent Office, thereby disabling entirely all those who have the strongest incentive to show that a patent is worthless. While the equities supporting Adkins’ position are somewhat more appealing than those supporting the typical licensor, we cannot say that there is enough of a difference to justify such a substantial impairment of overriding federal policy.
Nor can we accept a second argument which may be advanced to support Adkins’ claim to at least a portion of his post-patent royalties, regardless of the validity of the Patent Office grant. The terms of the 1955 agreement provide that royalties are to be paid until such time as “the patent is held invalid,” and the fact remains that the question of patent validity has not been finally determined in this case. Thus, it may be suggested that although Lear must be allowed to raise the question of patent validity in the present lawsuit, it must also be required to comply with its contract and continue to pay royalties until its claim is finally vindicated in the courts.
The parties’ contract, however, is no more controlling on this issue than is the State’s doctrine of estoppel, which is also rooted in contract principles. The decisive question is whether overriding federal policies would be significantly frustrated if licensees could be required to continue to pay royalties during the time they are challenging patent validity in the courts.
It seems to us that such a requirement would be inconsistent with the aims of federal patent policy. Enforcing this contractual provision would give the licensor an additional economic incentive to devise every conceivable dilatory tactic in an effort to postpone the day of final judicial reckoning. We can perceive no reason to encourage dilatory court tactics in this way. Moreover, the cost of prosecuting slow-moving trial proceedings and defending an inevitable appeal might well deter many licensees from attempting to prove patent invalidity in the courts. The deterrent effect would be particularly severe in the many scientific fields in which invention is proceeding at a rapid rate. In these areas, a patent may well become obsolete long before its 17-year term has expired. If a licensee has reason to believe that he will replace a patented idea with a new one in the near future, he will have little incentive to initiate lengthy court proceedings, unless he is freed from liability at least from the time he refuses to pay the contractual royalties.
Lastly, enforcing this contractual provision would undermine the strong federal policy favoring the full and free use of ideas in the public domain. For all these reasons, we hold that Lear must be permitted to avoid the payment of all royalties accruing after Adkins’ 1960 patent issued if Lear can prove patent invalidity.
The judgment of the Supreme Court of California is vacated and the case is remanded to that court for further proceedings not inconsistent with this opinion.
1. What is the source of what the Court variously termed: the “strong federal policy favoring free competition in ideas which do not merit patent protection,” the rule that “federal law requires that all ideas in general circulation be dedicated to the common good unless they are protected by a valid patent,” “the policy of the patent laws [that] would be frustrated if a manufacturer was required to pay for the use of information which under the patent statutes, was the property of all,” and “the strong federal policy favoring the full and free use of ideas in the public domain”?
Is it the Constitution, of its own force? A specific provision of the patent statute? A general emanation from the entire text of the patent statute, considered as a whole?
Consider, for example, §§ 102(a), 102(b), and 103. Do they indicate something more than that the PTO shall not issue patents when certain facts are the case?
2. The United States, as amicus curiae, made a three–step argument to support its contention that “the patent licensee estoppel doctrine thwarts the federal policy of assuring the public of free and open competition in unpatentable products”:
(a) “The policy of the federal patent and antitrust laws is to guarantee free and open competition in unpatented and unpatentable products.”
(b) “Federal policy favors invalidation of worthless patents.”
(c) “The doctrine of licensee estoppel is an obstacle to the achievement of these policies.”
Under heading (a), the government argued that the Patent Clause is recognized as “both a grant of power and a limitation” (Graham v. Deere). Comparable to the Statute of Monopolies, it prohibits Congress from granting patents on things already in the public domain. The same limitation therefore applies to states. Thus Stiffel/Compco held that states cannot use unfair competition law to prevent copying of unpatentable articles. Stiffel held that allowing that would “permit the State to block off from the public something which federal law has said belongs to the public.” (Where had federal law “said” that?)
Under heading (b), the government argued that “public policy favors the exposure of invalid patent monopolies before the courts in order to free the public from their effects” (quoting White., J., concurring in United States v. Singer Mfg. Co., 374 U.S. 174 (1963), an antitrust case in which the Court proscribed a conspiracy, among other things, to keep prior art from coming to the attention of the Patent Office). The government also relied on the passage from Pope v. Gormully which the Lear opinion quoted.
Argument (c) was that the public needed the efforts of persons such as Lear to vindicate the public’s interest in free competition. The government characterized the issue in the case as “enabling private litigants to invoke the power of the courts to relieve the channels of commerce of the anticompetitive burden of invalid patent monopolies.”
Are these arguments, in effect: “The Statute of Monopolies is part of the public policy of the United States”? Is it? Is it, for purposes of the Supremacy Clause? Can you define our National Competition Policy? What does it command or prohibit?
3. Lear is apparently the first case extending intellectual property preemption from state tort law (ŕla Stiffel) to state contract law, at least, outside the area of contracts in unreasonable restraint of trade. (Pope v. Gormully comes close, though, since in that case the Court denied specific performance of a contract (patent license) to refrain from making goods like those of the licensor.) Federal law has long been invoked, however, to hold unenforceable contracts that were enforceable under state law — for example, racially restrictive land covenants.
Early cases, such as some of those the Court mentions in Lear do not expressly raise the state law vs. federal law issue, absent an unusual state statute such as that in Gibbons v. Ogden. Why not? (Consider Erie Railway Co. v. Tompkins, 304 U.S. 64 (1937).)
4. Lear involves patent, or perhaps antitrust/patent/Statute of Monopolies, preemption of state contract law. Can you imagine comparable issues of copyright law preemption of state contract law? Are there copyright parallels to what the Lear Court terms a federal requirement “that all ideas in general circulation be dedicated to the common good unless they are protected by a valid patent”? What of 17 U.S.C. § 102(b)? 17 U.S.C. § 117?
Suppose that I sell you this book with a notice on the cover stating:
This book is sold to you only on the express understanding that you will not quote any part of it for purposes of adverse criticism or parody of my work. Do not buy the book if you are unwilling to agree to this condition, because I am unwilling to sell it to you on any other basis.
Can state law grant specific performance or damages to prevent or remedy your breach?
What of software and databases? Limitations on the use or disposition of computer programs or downloaded data? Prohibitions against reverse engineering? See David A. Rice, Public Goods, Private Contract and Public Policy: Federal Preemption of Software License Prohibitions Against Reverse Engineering, 53 U. Pitt. L. Rev. 543, 550-551 (1992). Against enhancements? Agreements not to design competitive products? See Lasercomb America, Inc. v. Reynolds, 911 F.2d 970 (4th Cir. 1990). If a use of a license clause is patent or copyright misuse, is the enforcement of the license under state contract law necessarily preempted? Can you think up any exceptions?
Goldstein v. California
United States Supreme Court
412 U.S. 546 (1973)
Mr. Chief Justice Burger delivered the opinion of the Court.
We granted certiorari to review petitioners’ conviction under a California statute (§ 653h) making it a criminal offense to “pirate” sound recordings produced by others.
Petitioners were engaged in what has commonly been called “record piracy” or “tape piracy”—the unauthorized duplication of recordings of performances by major musical artists. Petitioners would purchase from a retail distributor a single tape or phonograph recording of the popular performances they wished to duplicate. The original recordings were produced and marketed by recording companies with which petitioners had no contractual relationship. At petitioners’ plant, the recording was reproduced on blank tapes, which could in turn be used to replay the music on a tape player. After final packaging, the tapes were distributed to retail outlets for sale to the public, in competition with those petitioners had copied.
Petitioners made no payments to the artists whose performances they reproduced and sold; no payments were made to the producer, technicians, or other staff personnel responsible for producing the original recording and paying the large expenses incurred in production.
The challenged California statute forbids petitioners to transfer any performance fixed on a tape or record onto other records or tapes with the intention of selling the duplicates, unless they have first received permission from those who, under state law, are the owners of the master recording.
Petitioners first contend that the statute establishes a state copyright of unlimited duration, and thus conflicts with Art. I, § 8, cl. 8, of the Constitution. Second, petitioners claim that the state statute interferes with the implementation of federal policies inherent in the federal copyright statutes. According to petitioners, it was the intention of Congress, as interpreted by this Court in Stiffel and Compco, to establish a uniform law throughout the United States to protect original writings. As part of the federal scheme, it is urged that Congress intended to allow individuals to copy any work which was not protected by a federal copyright. Since § 653h effectively prohibits the copying of works which are not entitled to federal protection, petitioners contend that it conflicts directly with congressional policy and must fall under the Supremacy Clause of the Constitution.
We note at the outset that the federal copyright statutes to which petitioners refer were amended while their case was pending in the state courts. In 1971, Congress created federal copyright protection of recordings, for sound recordings “fixed” after February 15, 1972. The recordings which petitioners copied were all pre–February 15, 1972.
II. Exclusivity of Regulatory Power
Petitioners’ first argument rests on the premise that the state statute under which they were convicted lies beyond the powers which the States reserved in our federal system. If this is correct, petitioners must prevail, since the States cannot exercise a sovereign power which, under the Constitution, they have relinquished to the Federal Government for its exclusive exercise.
The clause of the Constitution granting to Congress the power to issue copyrights does not provide that such power shall vest exclusively in the Federal Government. Nor does the Constitution expressly provide that such power shall not be exercised by the States.
We must examine the manner in which the power to grant copyrights may operate in our federal system. The question whether exclusive federal power must be inferred is not a simple one, for the powers recognized in the Constitution are broad and the nature of their application varied. We must also be careful to distinguish those situations in which the concurrent exercise of a power by the Federal Government and the States or by the States alone may possibly lead to conflicts and those situations where conflicts will necessarily arise.
Article I, § 8, cl. 8, of the Constitution describes both the objective which Congress may seek and the means to achieve it. The objective is to promote the progress of science and the arts. As employed, the terms “to promote” are synonymous with the words “to stimulate,” “to encourage,” or “to induce.” To accomplish its purpose, Congress may grant to authors the exclusive right to the fruits of their respective works. The objective of the Copyright Clause was clearly to facilitate the granting of rights national in scope.
Although the Copyright Clause thus recognizes the potential benefits of a national system, it does not indicate that all writings are of national interest or that state legislation is, in all cases, unnecessary or precluded. The patents granted by the States in the 18th century show, to the contrary, a willingness on the part of the States to promote those portions of science and the arts which were of local importance. Whatever the diversity of people’s backgrounds, origins, and interests, and whatever the variety of business and industry in the 13 Colonies, the range of diversity is obviously far greater today in a country of 210 million people in 50 States. In view of that enormous diversity, it is unlikely that all citizens in all parts of the country place the same importance on works relating to all subjects. Since the subject matter to which the Copyright Clause is addressed may thus be of purely local importance and not worthy of national attention or protection, we cannot discern such an unyielding national interest as to require an inference that state power to grant copyrights has been relinquished to exclusive federal control.
The question to which we next turn is whether, in actual operation, the exercise of the power to grant copyrights by some States will prejudice the interests of other States. As we have noted, a copyright granted by a particular State has effect only within its boundaries. If one State grants such protection, the interests of States which do not are not prejudiced since their citizens remain free to copy within their borders those works which may be protected elsewhere. In the case of state copyrights, except as to individuals willing to travel across state lines in order to purchase records or other writings protected in their own State, each State’s copyrights will still serve to induce new artistic creations within that State—the very objective of the grant of protection. We do not see here the type of prejudicial conflicts which would arise, for example, if each State exercised a sovereign power to impose imposts and tariffs; nor can we discern a need for uniformity such as that which may apply to the regulation of interstate shipments.
Similarly, it is difficult to see how the concurrent exercise of the power to grant copyrights by Congress and the States will necessarily and inevitably lead to difficulty. At any time Congress determines that a particular category of “writing” is worthy of national protection and the incidental expenses of federal administration, federal copyright protection may be authorized. Where the need for free and unrestricted distribution of a writing is thought to be required by the national interest, the Copyright Clause and the Commerce Clause would allow Congress to eschew all protection. In such cases, a conflict would develop if a State attempted to protect that which Congress intended to be free from restraint or to free that which Congress had protected. However, where Congress determines that neither federal protection nor freedom from restraint is required by the national interest, it is at liberty to stay its hand entirely. Since state protection would not then conflict with federal action, total relinquishment of the States’ power to grant copyright protection cannot be inferred.
As we have seen, the language of the Constitution neither explicitly precludes the States from granting copyrights nor grants such authority exclusively to the Federal Government. The subject matter to which the Copyright Clause is addressed may at times be of purely local concern. No conflict will necessarily arise from a lack of uniform state regulation, nor will the interest of one State be significantly prejudiced by the actions of another. We therefore conclude that, under the Constitution, the States have not relinquished all power to grant to authors “the exclusive Right to their respective Writings.”
Petitioners base an additional argument on the language of the Constitution. The California statute forbids individuals to appropriate recordings at any time after release. From this, petitioners argue that the State has created a copyright of unlimited duration, in violation of that portion of Art. I, § 8, cl. 8, which provides that copyrights may only be granted “for limited Times.” Read literally, the text of Art. I does not support petitioners’ position. Section 8 enumerates those powers which have been granted to Congress. Whatever limitations have been appended to such powers can only be understood as a limit on congressional, and not state, action. Moreover, it is not clear that the dangers to which this limitation was addressed apply with equal force to both the Federal Government and the States. When Congress grants an exclusive right or monopoly, its effects are pervasive; no citizen or State may escape its reach. As we have noted, however, the exclusive right granted by a State is confined to its borders. Consequently, even when the right is unlimited in duration, any tendency to inhibit further progress in science or the arts is narrowly circumscribed. The challenged statute cannot be voided for lack of a durational limitation.
III. Conflict Analysis
Our conclusion that California did not surrender its power to issue copyrights does not end the inquiry. We must proceed to determine whether the challenged state statute is void under the Supremacy Clause. No simple formula can capture the complexities of this determination; the conflicts which may develop between state and federal action are as varied as the fields to which congressional action may apply. “Our primary function is to determine whether, under the circumstances of this particular case, state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Hines v. Davidowitz, 312 U.S. 52, 67 (1941). We turn, then, to federal copyright law to determine what objectives Congress intended to fulfill.
The word “writings” may be interpreted to include any physical rendering of the fruits of creative intellectual or aesthetic labor. Thus, recordings of artistic performances may be within the reach of Clause 8. While the area in which Congress many act is broad, the enabling provision of Clause 8 does not require that Congress act in regard to all categories of materials which meet the constitutional definitions. Rather, whether any specific category of “writings” is to be brought within the purview of the federal statutory scheme is left to the discretion of the Congress. The history of federal copyright statutes indicates that the congressional determination to consider specific classes of writings is dependent, not only on the character of the writing, but also on the commercial importance of the product to the national economy. As our technology has expanded the means available for creative activity and has provided economical means for reproducing manifestations of such activity, new areas of federal protection have been initiated.
Petitioners contend that the actions taken by Congress in establishing federal copyright protection preclude the States from granting similar protection to recordings of musical performances. According to petitioners, Congress addressed the question of whether recordings of performances should be granted protection in 1909; Congress determined that any individual who was entitled to a copyright on an original musical composition should have the right to control to a limited extent the use of that composition on recordings, but that the record itself, and the performance which it was capable of reproducing were not worthy of such protection. But the legislative history contains no indication that Congress intended records, as renderings of original artistic performance, to be free from state control.
Petitioners’ argument does not rest entirely on the belief that Congress intended specifically to exempt recordings of performances from state control. Assuming that no such intention may be found, they argue that Congress so occupied the field of copyright protection as to preempt all comparable state action. This assertion is based on this Court’s opinions in Sears and Compco. Sears and Compco, on which petitioners rely, do not support their position. In those cases, the question was whether a State could, under principles of a state unfair competition law, preclude the copying of mechanical configurations which did not possess the qualities required for the granting of a federal design or mechanical patent. In regard to mechanical configurations, Congress had balanced the need to encourage innovation and originality of invention against the need to insure competition in the sale of identical or substantially identical products. The standards established for granting federal patent protection to machines thus indicated not only which articles in this particular category Congress wished to protect, but which configurations it wished to remain free. The application of state law in these cases to the copying of articles which did not meet the requirements for federal protection disturbed the careful balance which Congress had drawn and thereby necessarily gave way under the Supremacy Clause of the Constitution. No comparable conflict between state law and federal law arises in the case of recordings of musical performances. In regard to this category of “writings,” Congress has drawn no balance; rather, it has left the area unattended, and no reason exists why the State should not be free to act.
More than 50 years ago, Mr. Justice Brandeis observed in dissent in International News Service v. Associated Press:
The general rule of law is, that the noblest of human productions – knowledge, truths ascertained, conceptions, and ideas – become, after voluntary communication to others, free as the air to common use.
But there is no fixed, immutable line to tell us which human productions are private property and which are so general as to become “free as the air.” In earlier times, a performing artist’s work was largely restricted to the stage; once performed, it remained recorded only in the memory of those who had seen or heard it. Today, we can record that performance in precise detail and reproduce it again and again with utmost fidelity.
The California statutory scheme evidences a legislative policy to prohibit “tape piracy” and “record piracy,” conduct that may adversely affect the continued production of new recordings, a large industry in California. Accordingly, the State has, by statute, given to recordings the attributes of property.
Justice Douglas, with whom Justices Brennan and Blackmun concur, dissenting.
Prior to February 25, 1972, copyright protection was not extended to sound recordings. Sears and Compco make clear that the federal policy expressed in Art. I, § 8, cl. 8, is to have “national uniformity in patent and copyright laws.”
The need for uniformity was stated by Judge Learned Hand in a dissent in Capitol Records, Inc. v. Mercury Records Corp. That case involved the duplication of uncopyrighted sound recordings, the court holding that state law prevailed where there was no federal copyright provision. Judge Hand emphasized in his dissent that “uniformity” was one of the principal purposes of the Patent and Copyright Clause and that uniformity could be obtained only by preemption.
1. Does any of this echo arguments made in Gibbons v. Ogden?
2. The Court says:
Section 8 enumerates those powers which have been granted to Congress. Whatever limitations have been appended to such powers can only be understood as a limit on congressional, and not state, action.
Would that suggest that states may grant patent–like protection of perpetual duration? On “innovations” actually in the public domain? Compare the Court’s subsequent distinction of the policies of patent and copyright law:
The standards established for granting federal patent protection to machines thus indicated not only which articles in this particular category Congress wished to protect, but which configurations it wished to remain free. The application of state law in these cases to the copying of articles which did not meet the requirements for federal protection disturbed the careful balance which Congress had drawn and thereby necessarily gave way under the Supremacy Clause of the Constitution. No comparable conflict between state law and federal law arises in the case of recordings of musical performances.
Is the attempted distinction persuasive? Is it ad hoc or suspect, ready to be discarded whenever opportune? Will the Court defer to the notion of a careful balance which Congress drew in the case of mechanical configurations between perceived needs to encourage innovation and also to insure competition—in a case in which the issue is actually to be decided? Is a major shift in perspective occurring?
3. The Court also adds:
In regard to this category of “writings,” Congress has drawn no balance; rather, it has left the area unattended, and no reason exists why the State should not be free to act.
How do you tell the difference between Congress just leaving an area unattended and its choosing to have the area left open to competition? What of obvious subject matter? What of subject matter in public use and on sale? What of ideas and nonstatutory subject matter? What of 17 U.S.C. § 102(b)? Unattended? Or a careful balance, not to be disturbed?
4. This is the first opinion in Justice Burger’s preemption trilogy. If amount of federal IP preemption can be represented as y = sin x, and Sears, Compo, Lear are in the zone around x = 90o, what would you suppose represents Justice Burger’s angle?
Kewanee Oil Co. v. Bicron Corp.
United States Supreme Court
417 U.S. 470 (1974)
Mr. Chief Justice Burger delivered the opinion of the Court.
We granted certiorari to resolve a question on which there is a conflict in the courts of appeals: whether state trade secret protection is preempted by operation of the federal patent law. In the instant case the Sixth Circuit held that there was preemption. The Second, Fourth, Fifth, and Ninth Circuits have reached the opposite conclusion.
Petitioner is a leading manufacturer of a type of synthetic crystal which is useful in the detection of ionizing radiation. In 1949 it commenced research into the growth of this type crystal and was able to produce one less than two inches in diameter. By 1966, as the result of expenditures in excess of $1 million, it was able to grow a 17-inch crystal, something no one else had done previously. It had developed many processes, procedures, and manufacturing techniques in the purification of raw materials and the growth and encapsulation of the crystals which enabled it to accomplish this feat. Some of these processes it considers to be trade secrets.
The individual respondents are former employees who formed or later joined respondent Bicron. While employees of petitioner the individual respondents executed, as conditions of employment, agreements requiring them not to disclose confidential information or trade secrets obtained as employees. Bicron was formed in August 1969 to compete with petitioner in the production of the crystals, and by April 1970 had grown a 17-inch crystal.
Petitioner brought this diversity action seeking injunctive relief and damages for the misappropriation of trade secrets. The district court, applying Ohio trade secret law, granted a permanent injunction against the disclosure or use by respondents of 20 of the 40 claimed trade secrets until such time as the trade secrets had been released to the public, had otherwise generally become available to the public, or had been obtained by respondents from sources having the legal right to convey the information.
The Sixth Circuit held that the findings of fact by the district court were not clearly erroneous, and that it was evident from the record that the individual respondents appropriated to the benefit of Bicron secret information obtained while they were employees of petitioner. Further, the court of appeals held that the district court properly applied Ohio law relating to trade secrets. Nevertheless, the court of appeals reversed the district court, finding Ohio’s trade secret law to be in conflict with the patent laws of the United States. The court of appeals reasoned that Ohio could not grant monopoly protection to processes and manufacturing techniques that were appropriate subjects for consideration under 35 U.S.C. § 101 for a federal patent but which had been in commercial use for over one year and so were no longer eligible for patent protection under 35 U.S.C. § 102(b).
We hold that Ohio’s law of trade secrets is not preempted by the patent laws of the United States and accordingly we reverse.
II. Trade Secret Law
Ohio has adopted the widely relied-upon definition of a trade secret found at Restatement of Torts § 757, comment b (1939):
A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.
The subject of a trade secret must be secret, and must not be of public knowledge or of a general knowledge in the trade or business. This necessary element of secrecy is not lost, however, if the holder of the trade secret reveals the trade secret to another in confidence and under an implied obligation not to use or disclose it. These others may include those of the holder’s employees to whom it is necessary to confide it in order to apply it to the uses for which it is intended. Often the recipient of confidential knowledge of the subject of a trade secret is a licensee of its holder.
The protection accorded the trade secret holder is against the disclosure or unauthorized use of the trade secret by those to whom the secret has been confided under the express or implied restriction of nondisclosure or nonuse. The law also protects the holder of a trade secret against disclosure or use when the knowledge is gained, not by the owner’s volition, but by some “improper means,” Restatement of Torts § 757(a), which may include theft, wiretapping, or even aerial reconnaissance. A trade secret law, however, does not offer protection against discovery by fair and honest means, such as by independent invention, accidental disclosure, or by so-called reverse engineering, that is by starting with the known product and working backward to divine the process which aided in its development or manufacture
Novelty, in the patent law sense, is not required for a trade secret. Quite clearly discovery is something less than invention. However, some novelty will be required if merely because that which does not possess novelty is usually known; secrecy, in the context of trade secrets, thus implies at least minimal novelty.
III. Exclusivity of Regulatory Power
The first issue we deal with is whether the States are forbidden to act at all in the area of protection of the kinds of intellectual property which may make up the subject matter of trade secrets.
In Goldstein v. California, we held that the grant of power to Congress was not exclusive and that, at least in the case of writings, the States were not prohibited from encouraging and protecting the efforts of those within their borders by appropriate legislation. The States could, therefore, protect against the unauthorized rerecording for sale of performances fixed on records or tapes, even though those performances qualified as “writings” in the constitutional sense and Congress was empowered to legislate regarding such performances and could preempt the area if it chose to do so. This determination was premised on the great diversity of interests in our Nation—the essentially non-uniform character of the appreciation of intellectual achievements in the various States. Evidence for this came from patents granted by the States in the 18th century.
Just as the States may exercise regulatory power over writings so may the States regulate with respect to discoveries. States may hold diverse viewpoints in protecting intellectual property to invention as they do in protecting the intellectual property relating to the subject matter of copyright. The only limitation on the States is that in regulating the area of patents and copyrights they do not conflict with the operation of the laws in this area passed by Congress, and it is to that more difficult question we now turn.
IV. Conflict Analysis
The question of whether the trade secret law of Ohio is void under the Supremacy Clause involves a consideration of whether that law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Hines v. Davidowitz, 312 U.S. 52, 67 (1941). We stated in Sears that when state law touches upon the area of federal statutes enacted pursuant to constitutional authority:
It is familiar doctrine that the federal policy may not be set at naught, or its benefits denied by the state law. This is true, of course, even if the state law is enacted in the exercise of otherwise undoubted state power.
The laws which the court of appeals in this case held to be in conflict with the Ohio law of trade secrets were the patent laws passed by the Congress in the unchallenged exercise of its clear power under the Constitution. The patent law does not explicitly endorse or forbid the operation of trade secret law. However, as we have noted, if the scheme of protection developed by Ohio respecting trade secrets “clashes with the objectives of the federal patent laws,” then the state law must fall. To determine whether the Ohio law “clashes” with the federal law it is helpful to examine the objectives of both the patent and trade secret laws.
The stated objective of the Constitution in granting the power to Congress to legislate in the area of intellectual property is to “promote the Progress of Science and useful Arts.” The patent laws promote this progress by offering a right of exclusion for a limited period as an incentive to inventors to risk the often enormous costs in terms of time, research, and development. The productive effort thereby fostered will have a positive effect on society through the introduction of new products and processes of manufacture into the economy, and the emanations by way of increased employment and better lives for our citizens. In return for the right of exclusion, the patent laws impose upon the inventor a requirement of disclosure. To insure adequate and full disclosure so that upon the expiration of the 17-year period “the knowledge of the invention enures to the people, who are thus enabled without restriction to practice it and profit by its use,” the patent laws require that the patent application shall include a full and clear description of the invention and “of the manner and process of making and using it” so that any person skilled in the art may make and use the invention. When a patent is granted and the information contained in it is circulated to the general public and those especially skilled in the trade, such additions to the general store of knowledge are of such importance to the public weal that the Federal Government is willing to pay the high price of 17 years of exclusive use for its disclosure, which disclosure, it is assumed, will stimulate ideas and the eventual development of further significant advances in the art. The Court has also articulated another policy of the patent law: that which is in the public domain cannot be removed therefrom by action of the States. “Federal law requires that all ideas in general circulation be dedicated to the common good unless they are protected by a valid patent.” Lear.
The maintenance of standards of commercial ethics and the encouragement of invention are the broadly stated policies behind trade secret law. “The necessity of good faith and honest, fair dealing, is the very life and spirit of the commercial world.” Even though a discovery may not be patentable, that does not “destroy the value of the discovery to one who makes it, or advantage the competitor who by unfair means, or as the beneficiary of a broken faith, obtains the desired knowledge without himself paying the price in labor, money, or machines expended by the discover.” Trade secret protection is important to the subsidization of research and development and to increased economic efficiency within large companies through the dispersion of responsibilities for creative developments.
Having now in mind the objectives of both the patent and trade secret law, we turn to an examination of the interaction of these systems of protection of intellectual property — one established by the Congress and the other by a State — to determine whether and under what circumstances the latter might constitute “too great an encroachment on the federal patent system to be tolerated.”
As we noted earlier, trade secret law protects items which would not be proper subjects for consideration for patent protection under 35 U.S.C. § 101. As in the case of the recordings in Goldstein, with respect to nonpatentable subject matter, Congress “has drawn no balance; rather, it has left the area unattended, and no reason exists why the State should not be free to act.”
Since no patent is available for a discovery, however useful, novel, and nonobvious, unless it falls within one of the express categories of patentable subject matter of 35 U.S.C. § 101, the holder of such a discovery would have no reason to apply for a patent whether trade secret protection existed or not. Abolition of trade secret protection would, therefore, not result in increased disclosure to the public of discoveries in the area of nonpatentable subject matter. Also, it is hard to see how the public would be benefited by disclosure of customer lists or advertising campaigns; in fact, keeping such items secret encourages businesses to initiate new and individualized plans of operation, and constructive competition results. This, in turn, leads to a greater variety of business methods than would otherwise be the case if privately developed marketing and other data were passed illicitly among firms involved in the same enterprise.
Congress has spoken in the area of those discoveries which fall within one of the categories of patentable subject matter of 35 U.S.C. § 101 and which are, therefore, of a nature that would be subject to consideration for a patent. Processes, machines, manufactures, compositions of matter and improvements thereof, which meet the tests of utility, novelty, and nonobviousness are entitled to be patented, but those which do not, are not. The question remains whether those items which are proper subjects for consideration for a patent may also have available the alternative protection accorded by trade secret law.
Certainly the patent policy of encouraging invention is not disturbed by the existence of another form of incentive to invention. In this respect the two systems are not and never would be in conflict. Similarly, the policy that matter once in the public domain must remain in the public domain is not incompatible with the existence of trade secret protection. By definition a trade secret has not been placed in the public domain.
The more difficult objective of the patent law to reconcile with trade secret law is that of disclosure, the quid pro quo of the right to exclude. We are helped in this stage of the analysis by Judge Henry Friendly’s opinion in Painton & Co. v. Bourns, Inc., 442 F.2d 216 (CA2 1971). There the court thought it useful, in determining whether inventors will refrain because of the existence of trade secret law from applying for patents, thereby depriving the public from learning of the invention, to distinguish between three categories of trade secrets:
(1) the trade secret believed by its owner to constitute a validly patentable invention;
(2) the trade secret known to its owner not to be so patentable; and
(3) the trade secret whose valid patentability is considered dubious.
Trade secret protection in each of these categories would run against breaches of confidence — the employee and licensee situations — and theft and other forms of industrial espionage.
As to the trade secret known not to meet the standards of patentability, very little in the way of disclosure would be accomplished by abolishing trade secret protection. With trade secrets of nonpatentable subject matter, the patent alternative would not reasonably be available to the inventor. There can be no public interest in stimulating developers of such unpatentable knowhow to flood an overburdened Patent Office with applications for what they do not consider patentable. The mere filing of applications doomed to be turned down by the Patent Office will bring forth no new public knowledge or enlightenment, since under federal statute and regulation patent applications and abandoned patent applications are held by the Patent Office in confidence and are not open to public inspection.
Even as the extension of trade secret protection to patentable subject matter that the owner knows will not meet the standards of patentability will not conflict with the patent policy of disclosure, it will have a decidedly beneficial effect on society. Trade secret law will encourage invention in areas where patent law does not reach, and will prompt the independent innovator to proceed with the discovery and exploitation of his invention. Competition is fostered and the public is not deprived of the use of valuable, if not quite patentable, invention.
Even if trade secret protection against the faithless employee were abolished, inventive and exploitive effort in the area of patentable subject matter that did not meet the standards of patentability would continue, although at a reduced level. Alternatively with the effort that remained, however, would come an increase in the amount of self-help that innovative companies would employ. Knowledge would be widely dispersed among the employees of those still active in research. Security precautions necessarily would be increased, and salaries and fringe benefits of those few officers or employees who had to know the whole of the secret invention would be fixed in an amount thought sufficient to assure their loyalty. Smaller companies would be placed at a distinct economic disadvantage, since the costs of this kind of self-help could be great, and the cost to the public of the use of this invention would be increased. The innovative entrepreneur with limited resources would tend to confine his research efforts to himself and those few he felt he could trust without the ultimate assurance of legal protection against breaches of confidence. As a result, organized scientific and technological research could become fragmented, and society, as a whole, would suffer.
Another problem that would arise if state trade secret protection were precluded is in the area of licensing others to exploit secret processes. The holder of a trade secret would not likely share his secret with a manufacturer who cannot be placed under binding legal obligation to pay a license fee or to protect the secret. The result would be to hoard rather than disseminate knowledge. Instead, then, of licensing others to use his invention and making the most efficient use of existing manufacturing and marketing structures within the industry, the trade secret holder would tend either to limit his utilization of the invention, thereby depriving the public of the maximum benefit of its use, or engage in the time-consuming and economically wasteful enterprise of constructing duplicative manufacturing and marketing mechanisms for the exploitation of the invention. The detrimental misallocation of resources and economic waste that would thus take place if trade secret protection were abolished with respect to employees or licensees cannot be justified by reference to any policy that the federal patent law seeks to advance.
Nothing in the patent law requires that States refrain from action to prevent industrial espionage. In addition to the increased costs for protection from burglary, wire-tapping, bribery, and the other means used to misappropriate trade secrets, there is the inevitable cost to the basic decency of society when one firm steals from another. A most fundamental human right, that of privacy, is threatened when industrial espionage is condoned or is made profitable; the state interest in denying profit to such illegal ventures is unchallengeable.
The next category of patentable subject matter to deal with is the invention whose holder has a legitimate doubt as to its patentability. The risk of eventual patent invalidity by the courts and the costs associated with that risk may well impel some with a good-faith doubt as to patentability not to take the trouble to seek to obtain and defend patent protection for their discoveries, regardless of the existence of trade secret protection. Trade secret protection would assist those inventors in the more efficient exploitation of their discoveries and not conflict with the patent law. In most cases of genuine doubt as to patent validity the potential rewards of patent protection are so far superior to those accruing to holders of trade secrets, that the holders of such inventions will seek patent protection, ignoring the trade secret route. For those inventors “on the line” as to whether to seek patent protection, the abolition of trade secret protection might encourage some to apply for a patent who otherwise would not have done so. For some of those so encouraged, no patent will be granted and the result will have been an unnecessary postponement in the divulging of the trade secret to persons willing to pay for it. If the patent does issue, it may well be invalid, yet many will prefer to pay a modest royalty than to contest it, even though Lear allows them to accept a license and pursue the contest without paying royalties while the fight goes on. The result in such a case would be unjustified royalty payments from many who would prefer not to pay them rather than agreed fees from one or a few who are entirely willing to do so.
The point is that those who might be encouraged to file for patents by the absence of trade secret law will include inventors possessing the chaff as well as the wheat. Some of the chaff — the nonpatentable discoveries — will be thrown out by the Patent Office, but in the meantime society will have been deprived of use of those discoveries through trade secret-protected licensing. Some of the chaff may not be thrown out. This Court has noted the difference between the standards used by the Patent Office and the courts to determine patentability. In Lear, the Court thought that an invalid patent was so serious a threat to the free use of ideas already in the public domain that the Court permitted licensees of the patent holder to challenge the validity of the patent. Better had the invalid patent never issued. More of those patents would likely issue if trade secret law were abolished. Eliminating trade secret law for the doubtfully patentable invention is thus likely to have deleterious effects on society and patent policy which we cannot say are balanced out by the speculative gain which might result from the encouragement of some inventors with doubtfully patentable inventions which deserve patent protection to come forward and apply for patents. There is no conflict, then, between trade secret law and the patent law policy of disclosure, at least insofar as the first two categories of patentable subject matter are concerned.
The final category of patentable subject matter to deal with is the clearly patentable invention, i.e., that invention which the owner believes to meet the standards of patentability. It is here that the federal interest in disclosure is at its peak; these inventions, novel, useful and nonobvious, are “the things which are worth to the public the embarrassment of an exclusive patent.” Graham v. John Deere (quoting Thomas Jefferson). The interest of the public is that the bargain of 17 years of exclusive use in return for disclosure be accepted. If a State, through a system of protection, were to cause a substantial risk that holders of patentable inventions would not seek patents, but rather would rely on the state protection, we would be compelled to hold that such a system could not constitutionally continue to exist. In the case of trade secret law no reasonable risk of deterrence from patent application by those who can reasonably expect to be granted patents exists.
Trade secret law provides far weaker protection in many respects than the patent law. While trade secret law does not forbid the discovery of the trade secret by fair and honest means, e.g., independent creation or reverse engineering, patent law operates “against the world,” forbidding any use of the invention for whatever purpose for a significant length of time. The holder of a trade secret also takes a substantial risk that the secret will be passed on to his competitors, by theft or by breach of a confidential relationship, in a manner not easily susceptible of discovery or proof. Where patent law acts as a barrier, trade secret law functions relatively as a sieve. The possibility that an inventor who believes his invention meets the standards of patentability will sit back, rely on trade secret law, and after one year of use forfeit any right to patent protection, 35 U.S.C. § 102(b), is remote indeed.
Nor does society face much risk that scientific or technological progress will be impeded by the rare inventor with a patentable invention who chooses trade secret protection over patent protection. The ripeness-of-time concept of invention, developed from the study of the many independent multiple discoveries in history, predicts that if a particular individual had not made a particular discovery others would have, and in probably a relatively short period of time. If something is to be discovered at all very likely it will be discovered by more than one person. Even were an inventor to keep his discovery completely to himself, something that neither the patent nor trade secret laws forbid, there is a high probability that it will be soon independently developed. If the invention, though still a trade secret, is put into public use, the competition is alerted to the existence of the inventor’s solution to the problem and may be encouraged to make an extra effort to independently find the solution thus known to be possible. The inventor faces pressures not only from private industry, but from the skilled scientists who work in our universities and our other great publicly supported centers of learning and research.
We conclude that the extension of trade secret protection to clearly patentable inventions does not conflict with the patent policy of disclosure. Perhaps because trade secret law does not produce any positive effects in the area of clearly patentable inventions, as opposed to the beneficial effects resulting from trade secret protection in the areas of the doubtfully patentable and the clearly unpatentable inventions, it has been suggested that partial preemption may be appropriate, and that courts should refuse to apply trade secret protection to inventions which the holder should have patented, and which would have been, thereby, disclosed. However, since there is no real possibility that trade secret law will conflict with the federal policy favoring disclosure of clearly patentable inventions partial preemption is inappropriate. Partial preemption, furthermore, could well create serious problems for state courts in the administration of trade secret law. As a preliminary matter in trade secret actions, state courts would be obliged to distinguish between what a reasonable inventor would and would not correctly consider to be clearly patentable, with the holder of the trade secret arguing that the invention was not patentable and the misappropriator of the trade secret arguing its undoubted novelty, utility, and nonobviousness. Federal courts have a difficult enough time trying to determine whether an invention, narrowed by the patent application procedure and fixed in the specifications which describe the invention for which the patent has been granted, is patentable. Although state courts in some circumstances must join federal courts in judging whether an issued patent is valid, it would be undesirable to impose the almost impossible burden on state courts to determine the patentability — in fact and in the mind of a reasonable inventor — of a discovery which has not been patented and remains entirely uncircumscribed by expert analysis in the administrative process. Neither complete nor partial preemption of state trade secret law is justified.
Trade secret law and patent law have co-existed in this country for over one hundred years. Each has its particular role to play, and the operation of one does not take away from the need for the other. Trade secret law encourages the development and exploitation of those items of lesser or different invention than might be accorded protection under the patent laws, but which items still have an important part to play in the technological and scientific advancement of the Nation. Trade secret law promotes the sharing of knowledge, and the efficient operation of industry; it permits the individual inventor to reap the rewards of his labor by contracting with a company large enough to develop and exploit it. Congress, by its silence over these many years, has seen the wisdom of allowing the States to enforce trade secret protection. Until Congress takes affirmative action to the contrary, States should be free to grant protection to trade secrets.
Since we hold that Ohio trade secret law is not preempted by the federal patent law, the judgment of the Court of Appeals for the Sixth Circuit is reversed, and the case is remanded with directions to reinstate the judgment of the district court.
Mr. Justice Marshall, concurring in the result.
Unlike the Court, I do not believe that the possibility that an inventor with a patentable invention will rely on state trade secret law rather than apply for a patent is “remote indeed.” State trade secret law provides substantial protection to the inventor who intends to use or sell the invention himself rather than license it to others, protection which in its unlimited duration is clearly superior to the 17-year monopoly afforded by the patent laws. I have no doubt that the existence of trade secret protection provides in some instances a substantial disincentive to entrance into the patent system, and thus deprives society of the benefits of public disclosure of the invention which it is the policy of the patent laws to encourage. This case may well be such an instance.
But my view of sound policy in this area does not dispose of this case. Rather, the question presented in this case is whether Congress, in enacting the patent laws, intended merely to offer inventors a limited monopoly in exchange for disclosure of their invention, or instead to exert pressure on inventors to enter into this exchange by withdrawing any alternative possibility of legal protection for their inventions. I am persuaded that the former is the case. State trade secret laws and the federal patent laws have co-existed for many, many years. During this time, Congress has repeatedly demonstrated its full awareness of the existence of the trade secret system, without any indication of disapproval. Indeed, Congress has in a number of instances given explicit federal protection to trade secret information provided to federal agencies. Because of this, I conclude that there is “neither such actual conflict between the two schemes of regulation that both cannot stand in the same area, nor evidence of a congressional design to preempt the field.” I therefore concur in the result reached by the majority of the Court.
Mr. Justice Douglas, with whom Mr. Justice Brennan concurs, dissenting.
Today’s decision is at war with the philosophy of Sears and Compco. Those cases involved patents — one of a pole lamp and one of fluorescent lighting fixtures each of which was declared invalid. The lower courts held, however, that though the patents were invalid the sale of identical or confusingly similar products to the products of the patentees violated state unfair competition laws. We held that when an article is unprotected by a patent, state law may not forbid others to copy it, because every article not covered by a valid patent is in the public domain. Congress in the patent laws decided that where no patent existed, free competition should prevail; that where a patent is rightfully issued, the right to exclude others should obtain for no longer than 17 years, and that the States may not “under some other law, such as that forbidding unfair competition, give protection of a kind that clashes with the objectives of the federal patent laws.”
The product involved in this suit, sodium iodide synthetic crystals, was a product that could be patented but was not. The inventor apparently contributed greatly to the technology in that field by developing processes, procedures, and techniques that produced much larger crystals than any competitor. These processes, procedures, and techniques were also patentable; but no patent was sought. Rather petitioner sought to protect its trade secrets by contracts with its employees. And the district court found that, as a result of those secrecy precautions, “not sufficient disclosure occurred so as to place the claimed trade secrets in the public domain”; and those findings were sustained by the court of appeals.
The district court issued a permanent injunction against respondents, ex-employees, restraining them from using the processes. By a patent which would require full disclosure petitioner could have obtained a 17-year monopoly against the world. By the district court’s injunction, which the Court approves and reinstates, it gets a permanent injunction running into perpetuity against respondents. In Sears, as in the present case, an injunction against the unfair competitor issued. We said:
To allow a State by use of its law of unfair competition to prevent the copying of an article which represents too slight an advance to be patented would be to permit the State to block off from the public something which federal law has said belongs to the public. The result would be that while federal law grants only 14 or 17 years’ protection to genuine inventions, States could allow perpetual protection to articles too lacking in novelty to merit any patent at all under federal constitutional standards. This would be too great an encroachment on the federal patent system to be tolerated.
The conflict with the patent laws is obvious. The decision of Congress to adopt a patent system was based on the idea that there will be much more innovation if discoveries are disclosed and patented than there will be when everyone works in secret. Society thus fosters a free exchange of technological information at the cost of a limited 17-year monopoly.
A trade secret, unlike a patent, has no property dimension. That was the view of the court of appeals, and its decision is supported by what Mr. Justice Holmes said in DuPont de Nemours Powder Co. v. Masland, 244 U.S. 100, 102:
The word property as applied to trade-marks and trade secrets is an unanalyzed expression of certain secondary consequences of the fact that the law makes some rudimentary requirements of good faith. Whether the plaintiffs have any valuable secret or not the defendant knows the facts, whatever they are, through a special confidence that he accepted. The property may be denied but the confidence cannot be. Therefore the starting point for the present matter is not property, but that the defendant stood in confidential relations with the plaintiffs, or one of them. These have given place to hostility, and the first thing to be made sure of is that the defendant shall not fraudulently abuse the trust reposed in him. It is the usual incident of confidential relations. If there is any disadvantage in the fact that he knew the plaintiffs’ secrets he must take the burden with the good.
A suit to redress theft of a trade secret is grounded in tort damages or breach of a contract. Damages for breach of a confidential relation are not preempted by the patent law, but an injunction against use is preempted because the patent law states the only monopoly over trade secrets that is enforceable by specific performance; and that monopoly exacts as a price full disclosure. A trade secret can be protected only by being kept secret. Damages for breach of a contract are one thing; an injunction barring disclosure does service for the protection accorded valid patents and is therefore preempted.
From the findings of fact of the lower courts, the process involved in this litigation was unique, such a great discovery as to make its patentability a virtual certainty. Yet the Court’s opinion reflects a vigorous activist antipatent philosophy. My objection is not because it is activist. This is a problem that involves no neutral principle. The Constitution expresses the activist policy which Congress has enforced by statutes. It is that constitutional policy which we should enforce, not our individual notions of the public good.
1. The Court says that state trade secret law protects subject matter left unattended by federal patent law. Under a Goldstein analysis, that subject matter is therefore not preempted.
Which of the following kinds of subject matter are left unattended by federal patent law:
• Algorithms and natural principles. Is that what Benson, Flook, and Diehr say?
• Products covered by expired patents. What does Scott Paper Co. v. Marcalus Co., 326 U.S. 249 (1945), say?
• Products covered by invalidated patents? Does Lear say anything?
• Technology commercially exploited for more than a year? See Bonito Boats.
If any of these things are not simply left unattended, but are deliberately made subject to free competition, how do you square that with the Court’s argument that unpatentable subject matter cannot be diverted away from the patent system’s disclosure machinery as a result of trade secret protection and therefore they can appropriately be protected by trade secret law?
2. The Court says that no problem is raised in regard to “the policy that matter once in the public domain must remain in the public domain.” The reason is that “by definition a trade secret has not been placed in the public domain.” Is the patent law concept of the public domain the same as that of trade secret law? What about a Ph.D. thesis that has been catalogued in the U. of East Dakota library and is available to anybody who goes there to read it? Compare In re Hall, 781 F.2d 897 (Fed. Cir. 1986) (patent case), with Franke v. Wiltschek, 209 F.2d 493 (2d Cir. 1953) (trade secret case).
3. The Court offers an elaborate economic analysis to support its conclusion that recognition of trade secret rights will not decrease disclosure under the patent system. The analysis includes encouragement of invention in areas where the patent law does not reach, costs of security precautions, salary and fringe benefit expenditures, relative advantage between large and small entrepreneurs, fragmentation of research, incentives to license, efficient allocation of resources, and PTO increased issuance of spurious or invalid patents. Is all of this based on empirical data in the record? On econometric studies? For a discussion of such data and its likely value to legal analysis, see R. Stern, A Reexamination of Preemption of Trade Secret Law after Kewanee, 42 Geo. Wash. L. Rev. 927, 946–48 (1974).
4. The brief that the United States submitted as amicus curiae, in response to the Court’s invitation, is curious. It presents primarily the view of scholars Bork and Kitch that state trade secret law is not preempted. Since “there is a view within the government, however, that federal law does in some measure oust state law in this field and that this case should be remanded for additional findings of fact,” the brief undertakes to describe both positions.
The view within the government for “ouster” was that of the Antitrust Division, then headed by Professor Kauper. In this view (as expressed in the Antitrust Division’s proposed brief for the United States, which Solicitor General Bork declined to file but summarized from a Bork–Kitch point of view in the government brief actually filed), one aspect of trade secret law interferes with the purpose of the patent system to promote technological progress by encouraging disclosure and another aspect interferes with the national policy in favor of free competition.
First, trade secret law diverts a significant number of inventions, having a value from millions to billions of dollars, away from the patent system into the secrecy system. (This premise rests on published statements of various patent and trade secret law experts and on data proffered in some amicus curiae briefs.) However, this preemption rationale applies only to constitutionally patentable inventions—i.e., “Discoveries” — statutory subject matter and such nonstatutory subject matter as Congress deliberately excluded because it considered them tools of technological progress (e.g., algorithms, as contrasted with literary techniques). The crystal technology in controversy in Kewanee was statutory subject matter, but that is a necessary and not a sufficient condition for preemption on a diversion theory. If the technology never could have been patented, it was not diverted away from the patent system. Therefore, analysis under §§ 102 and 103 may be needed.
An additional factor supporting preemption based on diversion from the patent system is that the operation of the trade secret law system interferes with uniformity of regulation of the field of intellectual property rights in technology, which Goldstein recognized (when distinguishing Stiffel and Compco) was not needed for copyright but was needed for patents.
Second, national competition policy preempts trade secret protection of non–novel technology but does not preempt protection of obvious technology. Congress intended technological ideas to be free from restraint, if they are non–novel in a § 102 sense; otherwise trade secret proprietors will arrogate portions of the public domain. That would be contrary to the careful economic balance Congress struck between competition and monopoly. This concern is central as to § 102 but only peripheral as to § 103. National competition policy also preempts perpetual injunctions, and therefore injunctions should be limited to the length of the head–start interval, as measured by how long reverse engineering would take or some other measure of projected duration of secrecy. (For another version of these arguments, from a different point of view, see A Reexamination of Preemption of Trade Secret Law after Kewanee, supra.)
The “official” view of the United States, which the Kewanee Court majority accepted, was that neither patent policy nor any alleged national competition policy required ouster of state trade secret law. The diversion theory was challenged on two grounds. First, patent law did not insist on disclosure; it simply offers a 17–year monopoly in exchange for disclosure. Second, there is no significant diversion of patentable inventions from the patent system to the secrecy system.
The official view held that the policy of the patent law is to offer an exchange rather than insist on it, which is shown by decades of co–existence between patent and trade secret law. Moreover, Congress has recognized trade secret interests in some federal regulatory statutes. It is unknown how much the existence of trade secret law motivates industry to keep technology secret rather than patent it. Therefore the argument is speculative and fails “to approach the degree of certitude that should be required when it is proposed to destroy an ancient and well–established body of state law.” The question should be left to Congress, which thus far has failed to act. The other view within the government, therefore, “is essentially an argument that Congress would have outlawed state trade secret laws if it had thought about them.”
Further, the official view maintained, the other view’s argument for a theory of partial preemption requires an awkward and unworkably complicated § 102/103 analysis under which the proprietor of a trade secret must show at least a reasonable and good faith belief that his secret was unpatentable at the time he elected secrecy. As for the alleged national competition policy, it “has too little definition to provide a source of preemption.” If measured by the standards of the Sherman Act, as appears relevant here (in the Bork-Kitch view), entrusting a trade secret to others facilitates exploitation of the secret and thus promotes allocative efficiency. It is thus procompetitive rather than anticompetitive.
5. The Court largely accepted the Bork–Kitch view. For example, it found no significant diversion from the patent system, saying:
If a State, through a system of protection, were to cause a substantial risk that holders of patentable inventions would not seek patents, but rather would rely on the state protection, we would be compelled to hold that such a system could not constitutionally continue to exist. In the case of trade secret law no reasonable risk of deterrence from patent application by those who can reasonably expect to be granted patents exists.
The Court said that two reasons supported this conclusion. First, trade secret protection is too weak and useless to divert many patentable inventions. (Is that true?) Second, the “ripeness of time concept” guarantees that some other person will in a very short time independently duplicate any patentable invention diverted, at worst only temporarily, to the trade secret system. (There are never any Fermat’s Last Theorems!)
6. The Court states:
The only limitation on the States is that in regulating the area of patents and copyrights they do not conflict with the operation of the laws in this area passed by Congress.
Do you agree that this is a correct statement of law? Is Congress limited from passing copyright statutes that protect non-original subject matter or non-“writings of authors”? What of The Trademark Cases? Can Congress pass patent laws that withdraw subject matter from the public domain? That protect things that are not Discoveries of Inventors? What does Graham v. Deere say?
7. Justice Douglas states, “A trade secret, unlike a patent, has no property dimension.” Its misappropriation is a tort or a breach of contract. From that, it follows that the grant of an injunction, rather than just damages for the tort or breach, allows a trade secret to usurp the office of a patent. Such an injunction is therefore preempted. Steeped as you are by now in the lore of Locke, Bentham, Willow River, quasi-property, and all of that — what do you say of Justice Douglas’ argument?
Aronson v. Quick Point Pencil Co.
United States Supreme Court
440 U.S. 257 (1979)
Mr. Chief Justice Burger delivered the opinion of the Court.
We granted certiorari to consider whether federal patent law preempts state contract law so as to preclude enforcement of a contract to pay royalties to a patent applicant, on sales of articles embodying the putative invention, for so long as the contracting party sells them, if a patent is not granted.
In October 1955 the petitioner, Mrs. Jane Aronson, filed an application for a patent on a new form of keyholder. Although ingenious, the design was so simple that it readily could be copied unless it was protected by patent. In June 1956, while the patent application was pending, Mrs. Aronson negotiated a contract with the respondent, Quick Point Pencil Co., for the manufacture and sale of the keyholder.
The contract was embodied in two documents. In the first, a letter from Quick Point to Mrs. Aronson, Quick Point agreed to pay Mrs. Aronson a royalty of 5% of the selling price in return for “the exclusive right to make and sell keyholders of the type shown in your application.” The letter further provided that the parties would consult one another concerning the steps to be taken “in the event of any infringement.”
The contract did not require Quick Point to manufacture the keyholder. Mrs. Aronson received a $750 advance on royalties and was entitled to rescind the exclusive license if Quick Point did not sell a million keyholders by the end of 1957. Quick Point retained the right to cancel the agreement whenever “the volume of sales does not meet our expectations.” The duration of the agreement was not otherwise prescribed.
A contemporaneous document provided that if Mrs. Aronson’s patent application was not allowed within five years, Quick Point would pay 2.5% of sales so long as Quick Point continues to sell.
In June 1961, when Mrs. Aronson had failed to obtain a patent on the keyholder within the five years specified in the agreement, Quick Point asserted its contractual right to reduce royalty payments to 2.5% of sales. The Board of Patent Appeals issued a final rejection of the application on the ground that the keyholder was not patentable, and Mrs. Aronson did not appeal. Quick Point continued to pay reduced royalties to her for 14 years thereafter.
The market was more receptive to the keyholder’s novelty and utility than the Patent Office. By September 1975 Quick Point had made sales in excess of $7 million and paid Mrs. Aronson royalties totaling $200,000. Sales were continuing to rise. However, while Quick Point was able to preempt the market in the earlier years and was long the only manufacturer of the Aronson keyholder, copies began to appear in the late 1960’s. Quick Point’s competitors, of course, were not required to pay royalties for their use of the design. Quick Point’s share of the Aronson keyholder market has declined during the past decade.
In November 1975 Quick Point commenced an action for a declaratory judgment, pursuant to 28 U.S.C. § 2201, that the royalty agreement was unenforceable. Quick Point asserted that state law which might otherwise make the contract enforceable was preempted by federal patent law. This is the only issue presented to us for decision.
Both parties moved for summary judgment on affidavits, exhibits, and stipulations of fact. The district court concluded that the “language of the agreement is plain, clear and unequivocal and has no relation as to whether or not a patent is ever granted.” Accordingly, it held that the agreement was valid, and that Quick Point was obliged to pay the agreed royalties pursuant to the contract for so long as it manufactured the keyholder.
The court of appeals reversed. It held that since the parties contracted with reference to a pending patent application, Mrs. Aronson was estopped from denying that patent law principles governed her contract with Quick Point. Although acknowledging that this Court had never decided the precise issue, the Court of Appeals held that our prior decisions regarding patent licenses compelled the conclusion that Quick Point’s contract with Mrs. Aronson became unenforceable once she failed to obtain a patent. The court held that a continuing obligation to pay royalties would be contrary to “the strong federal policy favoring the full and free use of ideas in the public domain,” Lear. The court also observed that if Mrs. Aronson actually had obtained a patent, Quick Point would have escaped its royalty obligations either if the patent were held to be invalid or upon its expiration after 17 years, see Brulotte v. Thys Co., 379 U.S. 29 (1964). Accordingly, it concluded that a licensee should be relieved of royalty obligations when the licensor’s efforts to obtain a contemplated patent prove unsuccessful.
On this record it is clear that the parties contracted with full awareness of both the pendency of a patent application and the possibility that a patent might not issue. The clause de-escalating the royalty by half in the event no patent issued within five years makes that crystal clear. Quick Point apparently placed a significant value on exploiting the basic novelty of the device, even if no patent issued; its success demonstrates that this judgment was well founded. Assuming, arguendo, that the initial letter and the commitment to pay a 5% royalty was subject to federal patent law, the provision relating to the 2.5% royalty was explicitly independent of federal law. The cases and principles relied on by the Court of Appeals and Quick Point do not bear on a contract that does not rely on a patent, particularly where, as here, the contracting parties agreed expressly as to alternative obligations if no patent should issue.
Commercial agreements traditionally are the domain of state law. State law is not displaced merely because the contract relates to intellectual property which may or may not be patentable; the states are free to regulate the use of such intellectual property in any manner not inconsistent with federal law. Kewanee; see Goldstein. In this as in other fields, the question of whether federal law preempts state law involves a consideration of whether that law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. Hines v. Davidowitz. If it does not, state law governs.
In Kewanee we reviewed the purposes of the federal patent system. First, patent law seeks to foster and reward invention; second, it promotes disclosure of inventions, to stimulate further innovation and to permit the public to practice the invention once the patent expires; third, the stringent requirements for patent protection seek to assure that ideas in the public domain remain there for the free use of the public.
Enforcement of Quick Point’s agreement with Mrs. Aronson is not inconsistent with any of these aims. Permitting inventors to make enforceable agreements licensing the use of their inventions in return for royalties provides an additional incentive to invention. Similarly, encouraging Mrs. Aronson to make arrangements for the manufacture of her keyholder furthers the federal policy of disclosure of inventions; these simple devices display the novel idea which they embody wherever they are seen.
Quick Point argues that enforcement of such contracts conflicts with the federal policy against withdrawing ideas from the public domain and discourages recourse to the federal patent system by allowing states to extend “perpetual protection to articles too lacking in novelty to merit any patent at all under federal constitutional standards,” Sears.
We find no merit in this contention. Enforcement of the agreement does not withdraw any idea from the public domain. The design for the keyholder was not in the public domain before Quick Point obtained its license to manufacture it. In negotiating the agreement, Mrs. Aronson disclosed the design in confidence. Had Quick Point tried to exploit the design in breach of that confidence, it would have risked legal liability. It is equally clear that the design entered the public domain as a result of the manufacture and sale of the keyholders under the contract.
Requiring Quick Point to bear the burden of royalties for the use of the design is no more inconsistent with federal patent law than any of the other costs involved in being the first to introduce a new product to the market, such as outlays for research and development, and marketing and promotional expenses. For reasons which Quick Point’s experience with the Aronson keyholder demonstrate, innovative entrepreneurs have usually found such costs to be well worth paying.
Finally, enforcement of this agreement does not discourage anyone from seeking a patent. Mrs. Aronson attempted to obtain a patent for over five years. It is quite true that had she succeeded, she would have received a 5% royalty only on keyholders sold during the 17-year life of the patent. Offsetting the limited terms of royalty payments, she would have received twice as much per dollar of Quick Point’s sales, and both she and Quick Point could have licensed any others who produced the same keyholder. Which course would have produced the greater yield to the contracting parties is a matter of speculation; the parties resolved the uncertainties by their bargain.
No decision of this Court relating to patents justifies relieving Quick Point of its contract obligations. We have held that a state may not forbid the copying of an idea in the public domain which does not meet the requirements for federal patent protection. Compco; Sears. Enforcement of Quick Point’s agreement, however, does not prevent anyone from copying the keyholder. It merely requires Quick Point to pay the consideration which it promised in return for the use of a novel device which enabled it to preempt the market.
In Lear we held that a person licensed to use a patent may challenge the validity of the patent, and that a licensee who establishes that the patent is invalid need not pay the royalties accrued under the licensing agreement subsequent to the issuance of the patent. Both holdings relied on the desirability of encouraging licensees to challenge the validity of patents, to further the strong federal policy that only inventions which meet the rigorous requirements of patentability shall be withdrawn from the public domain. Accordingly, neither the holding nor the rationale of Lear controls when no patent has issued and no ideas have been withdrawn from public use.
Enforcement of the royalty agreement here is also consistent with the principles treated in Brulotte v. Thys Co., 379 U.S. 29 (1964). There, we held that the obligation to pay royalties in return for the use of a patented device may not extend beyond the life of the patent. The principle underlying that holding was simply that the monopoly granted under a patent cannot lawfully be used to “negotiate with the leverage of that monopoly.” The Court emphasized that to “use that leverage to project those royalty payments beyond the life of the patent is analogous to an effort to enlarge the monopoly of the patent. Here the reduced royalty which is challenged, far from being negotiated “with the leverage” of a patent, rested on the contingency that no patent would issue within five years.
No doubt a pending patent application gives the applicant some additional bargaining power for purposes of negotiating a royalty agreement. The pending application allows the inventor to hold out the hope of an exclusive right to exploit the idea, as well as the threat that the other party will be prevented from using the idea for 17 years. However, the amount of leverage arising from a patent application depends on how likely the parties consider it to be that a valid patent will issue. Here, where no patent ever issued, the record is entirely clear that the parties assigned a substantial likelihood to that contingency, since they specifically provided for a reduced royalty in the event no patent issued within five years.
This case does not require us to draw the line between what constitutes abuse of a pending application and what does not. It is clear that whatever role the pending application played in the negotiation of the 5% royalty, it played no part in the contract to pay the 2.5% royalty indefinitely.
Our holding in Kewanee puts to rest the contention that federal law preempts and renders unenforceable the contract made by these parties. There we held that state law forbidding the misappropriation of trade secrets was not preempted by federal patent law. We observed:
Certainly the patent policy of encouraging invention is not disturbed by the existence of another form of incentive to invention. In this respect the two systems [patent and trade secret law] are not and never would be in conflict.
Enforcement of this royalty agreement is even less offensive to federal patent policies than state law protecting trade secrets. The most commonly accepted definition of trade secrets is restricted to confidential information which is not disclosed in the normal process of exploitation. Restatement of Torts § 757, comment b. Accordingly, the exploitation of trade secrets under state law may not satisfy the federal policy in favor of disclosure, whereas disclosure is inescapable in exploiting a device like the Aronson keyholder.
Enforcement of these contractual obligations, freely undertaken in arm’s-length negotiation and with no fixed reliance on a patent or a probable patent grant, will —
encourage invention in areas where patent law does not reach, and will prompt the independent innovator to proceed with the discovery and exploitation of his invention. Competition is fostered and the public is not deprived of the use of valuable, if not quite patentable, invention. [Kewanee.]
The device which is the subject of this contract ceased to have any secrecy as soon as it was first marketed, yet when the contract was negotiated an experienced novelty manufacturer agreedto pay for the opportunity to be first in the market. Federal patent law is not a barrier to such a contract. Reversed.
1. Non–theoretical harm to any National Competition Policy is hard to find in the Quick Point case. Other competitors existed. They paid no royalties for their use of the Aronson design. Quick Point’s market share was declining It is doubtful that monopoly exists or threatens in the keyholder market. Aronson’s contract was no sunken barge obstructing the stream of commerce.
Should the same legal analysis carry over to a case involving an Internet access supplier with a monopoly? A sole-ource defense contractor like Lear? (Assume that the monopolist or defense contractor will pass costs on to the public.) Is that a legitimate factor in analysis?
2. Suppose that the “contract” was not consensual. Consider a shrink-wrap software license. Or consider a quasi-contractual duty to pay imposed on one who reverse-engineered a computer program in violation of state law prohibiting reverse engineering without compensation. Consider a misappropriation law like New York’s, a licensor that licenses its state quasi-property right to exclude those who (absent royalties under a license) would reap where they have not sown, and a licensee like Quick Point who wants to renege. Consider the same misappropriation case against someone who refuses to take a license (a tortfeasor rather than a contract breacher).
What respective outcomes would be appropriate, given a preemption defense?
3. Curiously, if the patent had issued, federal policy would limit the duration of royalty obligations to the life of the patent. Brulotte v. Thys Co., 379 U.S. 29 (1964). If a patent issued and was then held invalid, Lear would allow termination of royalty payments.
Is there any anomaly? Is the absence of a federal monopoly grant, as a lever, material? Would Justice Burger change his position in the face of a state law monopoly grant — for example, quasi–property? Or would he simply say, “Which course would have produced the greater yield to the contracting parties is a matter of speculation; the parties resolved the uncertainties by their bargain.”
4. The Quick Point case is not really a trade secret case in the same way that Kewanee was. The secrets in Kewanee were the customary subject matter of trade secret law — industrial processes that did not become generally known at any material time. The “secret” in the Quick Point case was a keyholder comprising a hairpin–shaped piece of resilient (springy) metal and a plastic box with grooves permitting the two sides of the hairpin to be deformed and thus held by detents. A key is placed within the apex of the hairpin, by threading the resilient metal piece through a hole in the handle part of the key. The hairpin is then engaged with the grooves and detents of the plastic box, which deform the resilient sides of the hairpin, so that the key is held in place because the box blocks removal. To remove the key from the keyholder, the process is reversed. Thus, once the keyholder was marketed to the public, it became obvious to any competitor how to make the same product. Accordingly, Quick Point bought a head–start interest from Aronson, not a long–lived technological secret.
5. One amicus curiae brief in Quick Point, that of Ercon, Inc., a research and consulting firm, argued that the balance Congress struck between the patent system and the national competition policy is one placing a boundary between subject matter patentable under the patent laws because it is novel and unobvious and subject matter failing to meet that standard. Ercon argued that two different preemption rationales might result: (a) private parties should not be allowed to usurp control over the public domain by contract; or (b) contracts should not be enforced if they unduly disturb the congressionally struck balance.
a. The problem Ercon perceived with the first rationale was that “the phrase ‘in the public domain,’ as it has been used in the cases, is much less an empirical datum or operative fact than it is simply the reflection of an ultimate legal conclusion,” dependent on a great many policy notions that may become buried in rhetoric.
Cases could be postulated where enforcement of contracts something like that between Aronson and Quick Point would curtail the public domain and harm the public interest — although that would require a very different factual setting. For example, IBM might have a clause in its employment contracts in which the employee agrees that if he ever goes to work for a competitor or starts up his own company, he will pay a running royalty of 50% forever on any product that utilizes any of the confidential information he gained while in IBM’s employ, regardless of whether the information has become generally known (ŕla the keyholder Aronson created).
The United States, as amicus curiae, had assured the Court that it could rely on antitrust enforcement to safeguard the public against such risks. It also urged the Court not to create any legal standard that exceeded the requirements of the Sherman Act. Ercon said that the antitrust-enforcement option was an illusory promise.
b. Ercon urged the Court to adopt the second rationale. Any substantial disturbance of the balance should be impermissible “unless there is a permissible state purpose practicably achievable only by such state action.” The question is whether the public needs the party urging preemption to act as a surrogate for the public, so that it can enjoy the benefits of free competition. In such a case, muzzling an estopped licensee (see Lear), a disgruntled ex-employee (see Kewanee), or a dissatisfied party to a contract (see Quick Point) creates the risk that no other surrogate will step forward to vindicate the interest of the public.
The problem with that approach, however, is articulating a test for when the public needs a particular surrogate. Ercon argued for the same test mentioned above in a note after Kewanee — requiring the royalty length to be reasonably related to the head–start value of the secret disclosure. Ercon argued persuasively that this was a fair balance of the interests at stake and was the same as that which many states had adopted as a relief rule for trade secret injunctions. See, e.g., Northern Petrochem. Co. v. Tomlinson, 484 F.2d 1057, 1059 (7th Cir. 1973). However, Ercon was less persuasive in explaining why the rule (irrespective of objective fairness) should be imposed on state courts in the name of the Supremacy Clause, and in the face of an express agreement providing otherwise.
Can you supply the rationale that Ercon could not?
Link to second part of chapter 11
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