The Mercoid cases—Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661 (1944), and Mercoid Corp. v. Minneapolis-Honeywell Regulator Co., 320 U.S. 680 (1944)—are 1944 patent tie-in misuse and antitrust decisions of the United States Supreme Court. These companion cases are said to have reached the "high-water mark of the patent misuse doctrine."George Gordon & Robert J. Hoerner, Overview and Historical Development of the Misuse Doctrine, in 1, 15 (2000). The Court substantially limited the contributory infringement doctrine by holding unlawful tie-ins of "non-staple" unpatented articles that were specially adapted only for use in practicing a patent, and the Court observed: "The result of this decision, together with those which have preceded it, is to limit substantially the doctrine of contributory infringement. What residuum may be left we need not stop to consider."320 U.S. at 669. The Court also suggested that an attempt to extend the reach of a patent beyond its claims could or would violate the antitrust laws: "The legality of any attempt to bring unpatented goods within the protection of the patent is measured by the antitrust laws, not by the patent law."320 U.S. at 684.
In response to the Mercoid cases, the patent bar eventually persuaded Congress to limit the sweep of these rulingsDawson Chem. Co. v. Rohm & Haas Co., 448 U.S. 176, 200 (1980): "Certain segments of the patent bar eventually decided to ask Congress for corrective legislation that would restore some scope to the contributory infringement doctrine. With great perseverance, they advanced their proposal in three successive Congresses before it eventually was enacted in 1952...." by enacting sections 271(c) and (d) of the patent code in 1952.35 U.S.C. § 271(c)–(d). Those provisions rolled back to some extent the law on contributory infringement and tie-ins. Subsection (c) defined unlawful contributory infringement as the knowing sale of a non-staple product that is a material part of the invention and is specially adapted for the infringement of the patent—essentially, products without any use except infringement. Subsection (d) made it not misuse or illegal extension of patent rights for a patentee to derive revenue from what would be contributory infringement.See at 18. The Supreme Court in 1980 characterized this legislation limiting Mercoid as a compromise between the doctrines of misuse and contributory infringement."The approach that Congress took toward the codification of contributory infringement and patent misuse reveals a compromise between those two doctrines and their competing policies that permits patentees to exercise control over non-staple articles used in their inventions. Section 271(c) identifies the basic dividing line between contributory infringement and patent misuse. It adopts a restrictive definition of contributory infringement that distinguishes between staple and nonstaple articles of commerce. It also defines the class on nonstaple items narrowly." Dawson, 448 U.S. 200.
Background
The inventions
Walter M. Cross invented a hot-air furnace system with three main elements: (1) a motor driven stoker for feeding fuel to the combustion chamber of a furnace, (2) a room thermostatic switch for controlling the feeding of fuel, and (3) a combustion stoker switch to prevent the fire's going out in warm weather not requiring domestic heating. The room thermostat the supply of heat, or discontinues its supply, by closing or opening the circuit to the stoker motor at the required temperatures. The combustion stoker switch, or holdfire control, responds to a low temperature in the furnace by causing the stoker to feed fuel so as to prevent the furnace fire from going out. The control of the combustion stoker switch is effective in mild weather when the room thermostat may not call for heat for a considerable period.320 U.S. at 664.
Edward E. Freeman invented a system to control a hot air furnace that uses three thermostatic switches for its operation. A room thermostat starts the stoker. Another thermostat (or limit switch) opens the stoker circuit when the air in the furnace reaches a predetermined temperature, irrespective of the fact that the room thermostat may still call for heat. This second thermostat operates to prevent unsafe conditions due to overheating. The third thermostat is also in the furnace. It controls a fan which forces hot air from the furnace to the rooms. It does not permit the fan to start until the air in the furnace reaches a specified degree of heat. But, at that point, it starts the fan, which continues to run, even though the limit switch has stopped the stoker, so long as the furnace is hot and the room thermostat calls for heat. The patent was on the combination patent of three thermostatic switches, not on any of the switches alone and not on the combination of the fan switch and the limit switch.320 U.S. at 682.
Exploitation of patents
The Cross patent was assigned to Mid-Continent, subject to a prior exclusive license to Minneapolis-Honeywell Regulator Company (Honeywell) in the field of coal stokers. It was agreed that the patent royalty Honeywell would pay would be based on its sales of a combustion stoker control unit: an automatic electric switch responsive to temperatures of combustion gases or boiler water produced by an automatic coal fed stoker. Honeywell granted a sub-license to Detroit Lubricator Co. to make and sell combustion stoker switches and related apparatus for practicing the Cross invention. Mid-Continent, the patent owner, made no heating equipment but derived its revenue from royalties on the combustion stoker switch devices that Honeywell and Detroit Lubricator. Honeywell sent a letter to the trade advising it of the exclusive license, explaining that the patent rights cover a system involving the controls and the stoker in combination and not the controls alone, and offering a license on the entire system to purchasers of one of Honeywell's control units. Later, Mid-Continent sent a letter to the trade advising that it owned the patent rights and that the sale of equipment for practicing the patented invention was infringement unless licensed. Mid-Continent wrote a customer of Mercoid that it had learned that the customer was purchasing controls from a company (i.e., Mercoid) not licensed by Mid-Continent to sell controls; and that Mid-Continent wished to make this a formal notification that it considered the sale and use of controls for this purpose an infringement of its patent.Mid-Continent Inv. Co. v. Mercoid Corp., 43 F. Supp. 692, 694-95 (N.D. Ill. 1942).
The Freeman patent was assigned to Honeywell, which licensed five of its manufacturing competitors. The licenses grant a nonexclusive right to make, use, and sell a "combination furnace control" which is defined as a thermostatic switch usable for a Freeman installation and designed in one unit to control the fan and limit circuits. Royalty payments to Honeywell are based on the sales of the combination furnace controls, which are not patented as such (the system that includes them is patented) but have no use except in practicing the patent. The court of appeals said that the combination furnace control provides "the sequence of operations which is the precise essence of Freeman's advance in the art," in that it "accomplish[es] the sequence of operations of the Freeman patent" and "distinguish[ed] the invention" from the prior art. Each licensee was required to provide a notice to the effect that purchasing the control confers a license for one installation of the Freeman heating system. Minneapolis-Honeywell tried on several occasions to induce Mercoid to take a license but was unsuccessful.320 U.S. at 682-83.
Proceedings in lower courts
Trial courts
Cross patent
In November 1932, Mid-Continent mailed Mercoid a formal notice of infringement of the Cross patent. In August 1935, Mid-Continent brought suit against E.O. Smith of Carthage, Missouri, for infringement of the Cross patent by installing in his home a heating system including controls manufactured by Mercoid. Mercoid provided the defense of Smith but was not made a party to the suit. Mid-Continent prevailed against Smith. In September 1940, Mid-Continent sued Mercoid in Chicago federal district court for contributory infringement of the Cross patent. Mercoid, Mid-Continent, and Honeywell did not make heating systems; they sold thermostatic switches and related products. On Mercoid's motion, the court made Honeywell an involuntary co-plaintiff.Mid-Continent Inv. Co. v. Mercoid Corp., 43 F. Supp. 692, 693 (N.D. Ill. 1942).
The district court found that Honeywell and Mid-Continent "have in collusion conspired with each other in an attempt to monopolize the sale of combustion stoker switches, stoker controls or low limit controls, not covered by the Cross [patent]." It also held that the eight-year delay between the 1932 notice and the 1940 suit constituted laches precluding the action. The court concluded that the method of doing business was "the practical equivalent of granting a written license with the condition that the patented system may be practiced only with combustion stoker switches purchased from" licensees, thus running afoul of Carbice and Leitch. In addition to being patent misuse, the plaintiffs' conduct violated the antitrust law and made Mercoid entitled to an injunction against it.43 F. Supp. at 695-96.
The court ordered that the complaint should be dismissed, and enjoined each plaintiff from bringing suit for contributory infringement of the patent against Mercoid's customers, and from directly or indirectly threatening its customers with suit for such infringement of the patent, or in any manner interfering with Mercoid's business by use of the patent. On the antitrust claim, the court denied damages but ordered a perpetual injunction against both plaintiffs, their officers and agents, both individually and collectively, from doing the following things: From further engaging in or carrying out said conspiracy or any other conspiracy having a similar purpose or effect; From doing any act or thing having the same purpose or effect as the acts done in pursuance of such controversy, or promoting, or tending to promote the purpose or effect thereof involving the patent in suit; and From enforcing or carrying out, directly or indirectly, any of the provisions of the Honeywell license or its sub-licenses, or any similar licenses of the same tenor or effect, which involve the patent.Mid-Continent Inv. Co. v. Mercoid Corp., 133 F.2d 803, 806 (7th Cir. 1942).
Freeman patent
In June 1940 Mercoid sued Honeywell and Mid-Continent in Chicago federal district court for a declaratory judgment that its fan and limit controls did not infringe or contribute to the infringement of Honeywell's Freeman patent, that the patent was invalid, and that Honeywell was restraining trade in violation of the antitrust laws. Honeywell counterclaimed and sued for patent infringement. The district court held the patent not shown invalid but misused. The court explained the misuse: