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19. Discriminatory Licensing

  1. Plaintiff claims a violation of Section 2 because two competitors of SR have been treated differently.
  2. The SR and IBM agreements of 1956 and 1965 resulted in payments by IBM to SR of $11,100,000.
    1. See 18.5.1 through 18.5.4.
    2. One percent of IBM's EDP equipment manufacturing cost for the period 1957-64 was agreed by SR and IBM to be $11,100,000.
  3. The ENIAC application was an important factor in the considerations exchanged.
    1. See 15.24, 15.24.2, 15.24.13, 15.24.21, 15.24.25, 15.24.30, 16.2.2, 18.1.2, 18.2.1 through 18.2.3 and 18.5.1 through 18.5.4.
    2. During the course of the 1956 negotiations between IBM and SR, IBM insisted that any overall settlement include a license to IBM under SR's ENIAC patent application.
    3. The 1956 SR-IBM Agreement as consummated included a cross-license on EDP patents and applications filed prior to October 1, 1956. The ENIAC patent application was included in this group.
    4. Under the 1956 IBM-SR Agreement, SR received, among other things, licenses under IBM's tab patents and applications, and also received technical information on all IBM tabulating machines announced or released to production as of October 1, 1956.
    5. SR officials hoped that the 1956 IBM patent licenses and technical information would include patent licenses and technical information on a proposed IBM World Wide Accounting Machine (WWAM), and it had been estimated that the rights to this WWAM tabulating machine would be worth $20,000,000 to SR.
    6. SR also received pursuant to the 1956 IBM-SR Agreement patent licenses under IBM's EDP patents and applications, as well as EDP technical information, as of October 1, 1956.
    7. Among the patent licenses each party received pursuant to the 1956 IBM-SR Agreement were licenses under the patents or applications that were involved in eleven interferences with SR patents and applications.
    8. Each party also received from the other, pursuant to the 1956 IBM-SR Agreement, a release for past patent infringement, and IBM agreed to dismiss its counter-claim against SR for infringement of 35 patents.
    9. SR also received, pursuant to the 1956 IBM-SR Agreement $10,000,000 from IBM, plus a covenant by IBM to pay an additional royalty under the ENIAC patent, if a patent issued on the ENIAC patent application prior to January 1, 1965. This additional royalty was to be 1% of the manufacturing cost of each EDP machine embodying any invention covered by the claims of the ENIAC patent manufactured by IBM within the United States between October 1, 1956 and October 1, 1964 — after deducting the prepaid $10 million as a credit.
    10. Frost, SR's general patent counsel and its chief negotiator, had asked his patent people in 1956 to give him an estimate of the values of the respective patent positions of IBM and SR but they were unable to do so. Frost concluded that the only premise he could adopt was that the patents were equally balance in value.
    11. As to the entire noncash package SR received from IBM in 1956, Frost had been advised by UNIVAC personnel that it was worth from $30,000,000 to $40,000,000.
    12. Shortly after the ENIAC patent issued on February 4, 1964, Birkenstock, IBM's chief negotiator, wrote to T.J. Watson, Jr., IBM's chief executive:
    13. "The issuance of the 'ENIAC' patent to Sperry Rand after ten years of litigation makes our $10 million settlement look many times better than we figured it to be in 1956."

    14. After issuance of the ENIAC patent, IBM and SR became involved in a dispute concerning whether IBM owed additional royalties under the 1% provisions of the 1956 IBM-SR Agreement.
    15. After more than a year's negotiation, IBM and SR on November 15, 1965 reached an agreement.
    16. Under the provisions of the 1965 IBM-SR Agreement, IBM and SR exchanged paid-up nonexclusive cross-licenses in the field of "information handling" under patents and patent applications filed prior to November 15, 1970. Under the broad definition of "information handling" in the 1965 Agreement, SR received licenses under IBM's electric typewriter patents as well as under the 1956 IBM-SR Agreement, and IBM paid SR $1,100,000 upon the execution of the agreement.
    17. The ENIAC patent issued on February 4, 1964.
    18. On April 8, 1964, SR assigned its rights in the ENIAC patent to ISD, a wholly-owned subsidiary of SR.
    19. In June of 1964, ISD sent out notices of infringement of the ENIAC patent, with an offer to license "on reasonable terms" to various companies, including Honeywell. ISD offered to license these alleged infringers at 1-1/2% of the selling price of equipment covered by the ENIAC patent. Although ISD continued correspondence and discussions with various alleged infringers, no license agreements were concluded.
    20. Some allege infringers of the ENIAC patents, including Honeywell, insisted on including SR and its patents in the discussions.
  4. After the issuance of the ENIAC patent, the defendants initially demanded $250,000,000 from plaintiff for royalties.
    1. In a meeting on July 21, 1965, SR informed Honeywell that the ENIAC license royalty rate was 1-1/2% of the net selling price of each Honeywell EDP system sold or leased with no paid-up limit; SR later estimated that Honeywell's liability to it under this proposal for the 1964-1981 life of the ENIAC patent would be in excess of $200,000,000.
      1. SR and ISD communicated with Honeywell in 1965 and 1966, but negotiations dragged on into 1967.
    2. At a January 26, 1967 meeting, John Dority of SR stated that he had computed a potential liability of Honeywell approximating $250,000,000 using the 1-1/2 percent figure as applied to past and expected future shipments; Honeywell indicated to SR representatives that this was quite disproportionate to the $10,000,000 asked of IBM under the 1956 cross-license Agreement with IBM.
      1. At the urging of John Dority, UNIVAC patent counsel, a meeting was held on January 26, 1967. A that meeting, SR indicated to Honeywell that SR considered its EDP patent portfolio (excluding ISD's ENIAC patent) was more valuable than Honeywell's and that disparity alone should warrant the payment of a 1-1/2% royalty by Honeywell.
      2. Nevertheless, SR and ISD, in the cynically expressed hope of promptly getting the matter resolved, told Honeywell at their January 26, 1967 meeting that, in the context of a cross-license including the ENIAC patent, they would accept a lump-sum settlement of $1,250,000 annually for 15 years, plus a negotiated settlement for past infringement.
      3. Honeywell neither accepted the 1967 SR-ISD offer nor made a counter-offer. No license agreement was ever concluded and Honeywell has never paid any royalties to SR or ISD.
  5. This was later reduced to about $20,000,000.
    1. During the January 1967 meeting, SR indicated to Honeywell that it would accept, in the context of an EDP patent cross-license between Honeywell and SR and ISD, a lump sum settlement with Honeywell paying $1,250,000 annually for fifteen years, a total of $18,750,000, plus settlement for past liability.
  6. Defendants demanded royalties from the other members of the EDP industry.
    1. After issuance of the ENIAC patent on February 4, 1964, defendants systematically demanded royalties for a license under the ENIAC patent at a rate of 1-1/2% of the selling price of the affected equipment from all EDP industry members, including, among others, GE, Burroughs, RCA, NCR, CDC, Philco-Ford and numerous manufacturers of peripheral equipment; a royalty of 1-1/2 percent of the selling price (in dollars) of equipment sold or leased in the years of 1964-1967 by the main-frame manufacturers appears in Column A below and that four year total royalty multiplied by 4.25 produces a 17 year conservatively estimated royalty which appears in Column B as follows:
    2. A

      4 yr. royalty
      B

      17 yr. est. royalty

      General Electric

      $5,848,406$24,855,726

      RCA

      6,619,31728,132,097

      CDC

      9,857,21041,893,142

      NCR

      6,364,53127,049,257

      Philco-Ford

      420,8401,788,570

      Burroughs

      6,044,31625,688,343

      Totals

      $35,154,620$149,407,135
    3. Lump sum settlements in the context of cross-licenses with SR and ISD were offered to those alleged infringers with whom negotiations continued, including RCA and Honeywell, but no license agreements were concluded.
    4. During a July, 1965 meeting with Burroughs, SR indicated that it would consider granting a paid-up license for $20,000,000.
    5. In December, 1965, SR contacted representatives of GE and indicated that SR was willing to grant GE a paid-up license for $8,500,000
    6. In January, 1966, GE informed SR that the $8,500,000 paid-up license offered to them was unreasonable and discriminatory sine it was similar in total amount to the settlement give to IBM although GE's computer business was much smaller.
    7. At the October, 1966 meeting of SR and RCA, SR was prepared to offer RCA a cross-license at the rate of $1,250,000 per year for 15 years or an aggregate of $18,750,000.
    8. RCA rejected the SR demand as exorbitant.
  7. A substantial difference is that in 1956 the ENIAC patent was still in the application stage and in 1964 the patent had issued.
  8. It, of course, strains logic to settle with IBM (one of the two dominant members of the industry in 1956 and the monopolist in 1965 and now) for $11,100,000 and to demand in 1964-1967 from plaintiff (a minor factor in the industry) $250,000,000 or $20,000,000.
    1. The competitive situation and comparative patent portfolio values of IBM and SR during the license negotiations in 1956 are comparable to the competitive situation and comparative patent portfolio values of SR and Honeywell during their license negotiations in 1966-67.
    2. In the 1956 negotiations for an EDP cross-license between IBM and SR, SR representatives indicated to IBM representatives that the SR EDP patent and application portfolio, excluding the value of the then pending ENIAC patent application, was equal to the IBM EDP patent and application portfolio.
    3. In negotiations with IBM in 1965, SR contended that the $10,000,000 paid by IBM to SR under the 1956 Agreement was not adequate to cover 1% of IBM's EDP equipment manufacturing cost for the years 1957-64; as a result IBM paid and additional $1,100,000 royalty to SR under the 1965 Agreement.
    4. In answer to Honeywell's Interrogatory 58 in this case, SR stated that none of the $10,000,000 paid by IBM under the 1956 Agreement was attributable to a license under the ENIAC patent rights.
    5. Contemporaneous documents, however, indicate that IBM's license under the ENIAC patent rights was claimed by SR at a value equal to 1% of IBM's EDP equipment manufacturing cost for the years 1957-64; although SR represented in negotiations with Eckert and Mauchly that only 2% of the IBM 1956 Agreement royalty of $10,000,000 [or $200,000] was attributable to the license under the ENIAC patent rights; if this is accepted, the 30A patents and applications account for a larger part of the $10,000,000 than either conspirator admits.
    6. In negotiations between Honeywell and defendants in January 1967, defendants indicated that they regarded Honeywell's EDP patent and application portfolio as equal to defendant's EDP patent and application portfolio excluding the ENIAC patent.
    7. The IBM royalty rate under the ENIAC patent was 1% of EDP system and machine manufacturing cost over the 8 year period 1956-64 compared with the royalty rate demanded from Honeywell and the rest of the EDP industry of 1-1/2% of EDP systems and machine selling price or rental value over the 17 year period 1964-81.
    8. Had Honeywell been given the same arrangement as IBM for the same period 1957 through 1964, royalties for access to the ENIAC patent and the rest of the SR portfolio would have totaled merely $953,680 compared with the minimum $20,000,000 demand made by defendants before ISD sued.
    9. Honeywell's royalty based on 1-1/2% of the selling price or rental value of shipments for the four year period immediately following the issuance of the ENIAC patent would have been in excess of $8,000,000 and would greatly increase every year.
  9. I believe competitors should in fairness be treated somewhat equally but find no violation of the antitrust laws.
    1. Honeywell has not shown that acceptance of defendants' 1967 license offer would have caused a substantial impairment of competition in the relevant market; it would have increased cost or reduced profit on the basis of 1 1/2% of price.
    2. In order to sustain a finding of patent misuse or a Sherman Act violation based on discriminatory licensing, at least one of the following must be (a) the plaintiff took a license; (b) the royalty rate charged plaintiff and that charged a competitor were unequal; (c) in all particulars relevant to equality of rates plaintiff and its licensed competitor were similarly situated; and (d) the royalties were an important expense factor in the production costs and the discriminatory rate caused substantial impairment of competition in the relevant market.
    3. Honeywell failed to prove that defendant's offers to license the ENIAC patent and SR's EDP patents violated the Sherman Act, injured Honeywell in its business or property, or provide any basis for declaring the ENIAC patent invalid or unenforceable.
    4. Even if Honeywell had proven an impropriety on defendant's part in making the 1964-67 license offers, any such impropriety would have been cured and purged by the placing of ISD's patent infringement case (and the question of appropriate royalties or infringement damages) before the Court.
  10. Plaintiff has not proven injury.
    1. Honeywell has not shown that the SR-ISD 1964-67 offers to license their patents injured Honeywell in its business or property.

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