Support the IHA

18. 1965 Agreement of SR and IBM

  1. Following the issuance of the ENIAC patent, the question of whether further payments were required under the 1956 Agreement required resolution.
    1. The 1956 Agreement required that IBM pay minimum royalties to SR of $10,000,000 in eight $1,250,000 annual installments; an additional royalty of 1 percent of IBM's EDP manufacturing costs (for infringing equipment) from October 1, 1956 to September 30, 1964, after crediting the $10,000,000 prepaid, was due if the ENIAC patent should issue prior to December 31, 1964.
    2. After the ENIAC patent issued on February 4, 1964, SR served notice on IBM claiming additional royalties under the 1956 Agreement, and asked IBM to prepare a statement (certified by independent auditors) of additional royalties due as provided by the 1956 Agreement.
      1. Subsequent to the issuance of the ENIAC patent in 1964, IBM and SR engaged in a dispute concerning whether IBM owed SR additional royalties under a provision of the 1956 IBM-SR Agreement.
    3. On April, 24, 1964, J. Birkenstock of IBM furnished SR with a certified "Statement of Additional Royalty Due" which concluded that since IBM's total manufacturing costs from the period October 1, 1956 for all EDP equipment, infringing or not, did not exceed $1,000,000,000 (making 1% of that less than the $10,000,000 fixed royalty), IBM owed no further royalties other than the remaining fixed royalty payment.
    4. On May 1, 1964, C. Mctiernan of SR informed IBM that in SR's opinion IBM had not fulfilled its obligation under the 1956 Agreement as regards furnishing a royalty statement; accordingly, SR requested a formal, exact, detailed presentation which would enable it to certify IBM's accounting.
    5. During 1964 and 1965, IBM and SR continued to negotiate in an attempt to arrive at a satisfactory resolution to their controversy; the main points at apparent issue, aside from the validity of the ENIAC patent, were the interpretation of IBM's obligations under the 1956 Agreement, the scope of the ENIAC patent claims as they related to IBM equipment (which SR claimed covered some TAB machines) and the accounting measures used by IBM to arrive at its manufacturing costs for infringing equipment.
  2. In 1964 or 1965 IBM was still contending that the ENIAC was invalid for a number of reasons.
    1. At a December 15, 1964 meeting between IBM and SR patent representatives, Charles Walker, outside patent counsel of IBM, contended that if IBM should prevail on any one of four stated positions in a court contest, the ENIAC patent would be declared invalid; the four contentions were:
    2. .1 The ENIAC patent fails with respect to public use;

      .2 Even if SR should persuade the Court that use up to a certain time was experimental, the public use was nevertheless more than a year before claims to the system were first introduced.

      .3 Although IBM is a licensee, it has the right to construe a patent and the background against which it should be read; and

      .4 Certain claims from the ENIAC patent read on the Phelps patent [See 6.1 through 6.1.7]

    3. At a February 5, 1965 meeting of representatives of SR and IBM, IBM outside counsel again contended that the ENIAC machine had been in public use and that IBM retained the right under the 1956 Agreement to raise the public use case against the ENIAC patent; IBM also correctly contended that the public interest would be to have an invalid patent declared invalid, and that Judge Dawson in the SR v. BTL case made a clear error in finding experimental instead of public use.
    4. At an August 11, 1965 meeting of SR and IBM representatives, IBM again contended that the ENIAC patent was invalid by reason of public use and the Phelps patent and reiterated the late claiming defense [See 10.1] and IBM's position that the scope of the ENIAC patent should not include input and output units; at this meeting IBM gave SR a report, prepared as a result of earlier meetings with SR, detailing these contentions.
  3. It had, however, in 1959 or 1960 given up its strongest argument or invalidity because of public use.
    1. See 16.2.1 through 16.2.10 and 16.3.1 through 16.3.4.
  4. The dispute resolved into an accounting issue and IBM agreed to further payment of $1,100,000.
    1. See 18 through 18.1.5 and 18.5 through 18.5.4.
  5. This payment was conditioned by the 1956 agreement on the issuance of the ENIAC application, and it appears that much of the total $11,100,000 paid by IBM to SR represented ENIAC royalties.
    1. The 1956 Agreement contains a specific definition of the ENIAC application and also provides specifically and separately for an additional royalty to be paid in the event ENIAC finally ripened into a patent; the ENIAC application was a significant issue, was negotiated separately from the other issues, was eventually settled separately from the other issues and was the subject of a specific provision in the 1956 Agreement and again the 1965 renewal or extension agreement.
    2. The 1956 Agreement called for IBM to pay minimum royalties to SR of $10,000,000 plus an additional royalty of 1% of IBM's EDP manufacturing costs (for infringing equipment) from October 1, 1956 to September 30, 1964, after crediting the $10,000,000, if the ENIAC patent should issue prior to December 31, 1964.
    3. Under the 1956 Agreement no additional royalties were payable by IBM if the ENIAC patent did not issue or was invalidated of held unenforceable.
    4. On November 15, 1965, SR and IBM entered into a complete cross-license on all information handling systems patents and patent applications filed between that date and November 15, 1970 and agreed that IBM should pay SR $1,100,000 to settle the dispute over additional royalty due because of the issuance of the ENIAC patent; this accomplished "peaceful co-existence" between the co-conspirators for five more years, each being free to infringe each other's patents without risk.
      1. After more than a year's negotiation, IBM and SR on November 15, 1965 reached an agreement resolving, among other things, the dispute concerning the 1956 IBM-SR Agreement.
      2. Under the provisions of their 1965 Agreement IBM and SR exchanged paid-up nonexclusive cross-licenses in the field of "information handling" under patents and future patent applications filed prior to November 15, 1970. Moreover, IBM and SR released each other from all claims under the 1956 agreement, and IBM paid SR $1,100,000 upon the execution of the agreement.
  6. What is difficult to measure is what part in the 1956 agreement the fact of dismissal of the SR antitrust suit against IBM and other factors played.
  7. IBM was then, and should be now, apprehensive about antitrust lawsuits.
    1. See 15.26.4 through 15.26.30.
  8. The fact is that plaintiff and the newcomers in the EDP market in 1956, including Burroughs, NCR, RCA and others, should have in 1956 or later sued SR and IBM which then controlled about 95% of the EDP market.
    1. Had such a suit or suits been commenced by filing prior to May 26, 1963, Judicial notice may be taken that they could not have resulted in a trial in less than two (2) to four (4) years nor in a decision in less than four (4) to six (6) years after commencement.
    2. Had such a suit or suits been commenced, judicial notice may be taken that evidence of damage in any one year which flowed from non-access to the shared technology would not have been available until after the end of at least that year or one prior thereto and projections as to the future from deprivation in the past would have been subject to vigorous objection as speculative and conjectural even though broad-based injunctive relief could have been awarded as protection for years in the future.
    3. To illustrate, had the lawsuit been filed in 1957 or 1958 and come to trial and decision in 1960 ( a most unlikely event), evidence of the technology-shared damage could have been offered for the years 1957, 1958 and 1959 but estimates of any "pour-over" until 1961 or later would have been met with the objection of guesswork even though the plaintiff (Honeywell for instance) was assumed not only to have been granted free access by discovery to see but also the right to use the shared technology by 1960 as a result of final decree and no appeal.
  9. I find that regardless of whatever further accommodation of the interests of SR and IBM resulted from the 1965 Agreement, that the agreement did not violate the antitrust laws.
    1. Honeywell has not proven that the 1965 IBM-SR Agreement was an unreasonable restraint on trade.
    2. Nonexclusive patent cross licensing in itself may be proper.
    3. Honeywell has not proven that the 1965 IBM-SR Agreement violated the Sherman Act or injured Honeywell in its business or property.
  10. Plaintiff has failed to prove injury.
    1. Honeywell has not proven that the 1965 IBM-SR Agreement, in itself, had any effect on Honeywell.
    2. Honeywell has not shown that it was injured in its business or property by reason of the 1965 IBM-SR Agreement.

©1995-2015 by the Independence Hall Association, a nonprofit organization in Philadelphia, PA founded in 1942. Publishing electronically as; online since July 4, 1995.
Interested in using a picture?
Or a site description? Click here!
Take an audiowalk
iPod or CD-ROM tour of historic Philadelphia! Proceeds support (Independence Hall Association). More info...

Mailing address:
Independence Hall Association
Carpenters' Hall • 320 Chestnut St. • Philadelphia, PA 19106