United States v. Westinghouse Electric Corp.,648 F.2d 642 (9th Cir. 1981), affirming United States v. Westinghouse Electric Corp., 471 F. Supp. 532 (N.D. Cal., 1978). 648 F.2d 642 (9th Cir. 1981), is a patent-antitrust case in which the United States unsuccessfully tried to persuade the court that a patent and technology licensing agreement between major competitors in the highly concentrated heavy electrical equipment market—Westinghouse, Mitsubishi Electric (Melco) and Mitsubishi Heavy Industries (MHI)—which had the effect of territorially dividing world markets, violated § 1 of the Sherman Act.15 U.S.C. § 1. The Government had two principal theories of the case: (1) the arrangement is in unreasonable restraint of trade because its effect is to lessen competition substantially by precluding the Japanese defendant companies from bidding against Westinghouse on equipment procurements in the United States, when they are ready, willing, and able to do so; and (2) the arrangement is an agreement—explicit or tacit—to divide markets, which is illegal per se under § 1.The case was said to be "one of the most controversial filed by Assistant Attorney General Richard W. McLaren." See James H. Wallace, Multinational Patent And Know-How Arrangements, 39 L.J. 791, 794 (1970). Neither theory prevailed.

Background

General Electric (not a party to this action) and Westinghouse are the two leading U.S. manufacturers and sellers of heavy electrical equipment such as power transformers, power circuit breakers, hydroelectric generators, and gas and steam turbines. Melco and MHI are the leading Japanese manufacturers and sellers of such equipment. The relationship between Westinghouse and the two Mitsubishi defendants and their predecessors extends back to the early part of the 20th century. Prior to World War II they were parties to contracts (for example, a 1923 contract, which, the district court said, "apparently divided world markets between Westinghouse and the predecessors of the Mitsubishi defendants') under which Westinghouse supplied them technical and manufacturing information and received royalties on the sale of their products. These agreements permitted the predecessors of the Mitsubishi defendants to sell the products only in Japan and China. The arrangement was interrupted by World War II.

After the War, Westinghouse entered into the first of several technical assistance agreements with Melco in 1951 and with a predecessor of MHI in 1952. These agreements have continued since that time; they licensed Melco and MHI under Westinghouse's heavy electrical equipment patents to make and sell throughout the world except Canada and the United States, and provided for Westinghouse to furnish Melco and MHI with technical information to make the products. The agreements reciprocally authorized Westinghouse to make and sell, except in Japan, products incorporating patented technology and know-how that Melco and MHI transferred to Westinghouse.United States v. Westinghouse Elec. Co., 471 F. Supp. 532, 535 (N.D. Cal. 1978). The Government sued Westinghouse, Melco, and MHI in the Northern District of California (San Francisco) for combining and conspiring to restrain trade and commerce in heavy electrical equipment.

The Government relied on evidence which "conclusively establish[ed] that Melco and MHI each refrained from selling products falling within the Licensing and Technology Agreements in the United States and Canada without first obtaining Westinghouse approval." The evidence was mainly sets of correspondence and other documents relating to a number of bidding "incidents," in each of which a Japanese defendants wrote to Westinghouse requesting to bid on a particular hydroelectric project or other project using heavy electrical equipment, and then Westinghouse granted the request if it was not interested in itself bidding or denied the request otherwise.471 F. Supp. at 538.

For example, the government cited the period from January 1966 to March 1967 in which Mitsubishi Electric received a number of specific bid inquiries for the sale of electrical equipment to the United States, including projects for the Sacramento Municipal Utility District, the California Department of Water Resources, the Turlock & Modesto Irrigation District (California), and the Bureau of Reclamation, United States Department of the Interior. In each instance Westinghouse, after inquiry from Mitsubishi Electric, refused to allow Mitsubishi Electric to bid on the projects, and it did not do so.Timothy E. Kish, Antitrust Considerations in International Corporate Activity: Technical Assistance Agreements and Foreign Acquisitions, 12 B.C. 453, 454 (1971).

The district court concluded, however, that this merely showed the Japanese defendants' desire to avoid committing patent infringement. The court also said that the parties' agreements "provide a strong inference that patents extend to all licensed products involved in this suit." Thus, the court said, "the Government's own evidence thus raises competing inferences of a legitimate 'patent motivation,' on the one hand, and an illegal agreement, on the other, to explain defendants' conduct," and the Government failed to persuade the court that the motivation was a desire to divide territories rather than to respect patent rights.

The Government also offered a number of documents in which permission to bid in the United States or Canada was denied without mention of patents. The court refused to infer that this indicated an illegal agreement to divide markets. It said:

Contrary to the Government's assertions, the precise language used by the defendants in their day-to-day dealings is not indicative of an illegal arrangement simply because the word "patent" was not used. It is hardly strange or incriminating for the parties in dealings among themselves or with strangers to say that the agreement "prohibits sale in the United States," even though a more precise statement would be, for example, that "since our agreement does not give patent licenses for sales in the United States any such sales are, in effect, prohibited because they could result in patent infringement litigation." This is particularly true of those employees and independent marketing agents whose obvious interest is in whether, as opposed to why, a product can or cannot be sold.471 F. Supp. at 540.

The district court (Judge Stanley Weigel) held that the legal significance of the repeated case–by–case requests for approval to bid "depends on the state of mind of Melco and MHI in seeking Westinghouse approval." The court refused to infer the existence of an illegal agreement not to compete in the United States. It agreed with the defendants that Melco and MHI did not refrain from competing in the United States on the basis of an illegal agreement with Westinghouse but rather out of fear of infringing Westinghouse patents. The court dismissed the contention that the grant of a patent license outside the United States coupled with case–by–case and customer–by–customer approvals or denials of bid permission violated § 1 of the Sherman Act. The court approved instead the argument that "a patentee's right to shut off all competition must necessarily include the lesser right to restrict the exercise of the granted privilege so long as the patentee does not attach a condition that enlarges his monopoly beyond that given by the patent statute and the patent itself."471 F. Supp. at 541. Cf. Button-Fastener case#Sixth Circuit ruling; Motion Picture Patents Co. v. Universal Film Manufacturing Co.#The rise of the inherency doctrine. The court dismissed the case.

Ruling of Ninth Circuit

The Government appealed the dismissal judgment to the Ninth Circuit, which affirmed the judgment of no antitrust violation.

The court described the Government's principal theory in these terms"

The United States market for the electrical products covered by the agreements is heavily concentrated. Although they are two of the largest manufacturers of electrical products outside the United States, MHI and MELCO do not compete in this market. Their entrance into the United States market would substantially increase the amount of competition in that market. By 1965 MELCO and MHI wished to sell in the United States and had the technical ability to design around Westinghouse's many patents. Their failure to do so, the government contends, is a direct result of the Technical Assistance Agreements. Because MELCO and MHI are licensed by the Agreements under Westinghouse's foreign patents, and because they have had such licenses for a long period of time, they have become so committed to Westinghouse technology as to be economically incapable of developing new products that might compete in the United States without infringing upon Westinghouse's United States patents. Without licenses under Westinghouse's United States patents, MELCO and MHI are effectively barred from the United States market by dint of the patent laws and the heavy investment in Westinghouse technology that the Technical Assistance Agreements induced them to make.United States v. Westinghouse Elec. Corp., 648 F.2d 642, 645–46 (9th Cir. 1981). This legal theory had been articulated in 1971 in a journal article by Richard H. Stern, then chief of the patent unit in the Justice Department. See Note, Antitrust Problems in International Technology Transfers, 57 745, 753 n.62 (1982) (citing Richard H. Stern, The Antitrust Status of Territorial Limitations in International Licensing, 14 IDEA 580 (1971).

The Ninth Circuit considered this theory "novel and laced with paradox":

By the act of helping MELCO and MHI to prosper and to grow into large corporations in its own image, Westinghouse is said to have insulated its home market from their competition in violation of the antitrust laws. The government urges that although the Agreements may not have resulted in an unreasonable restraint of trade when first signed in 1951 and 1952, at some point in 1965, when MELCO and MHI became capable of competing in the United States and capable of designing around Westinghouse's patents but for their investment in Westinghouse technology, the Agreements came to violate the antitrust laws. Accordingly, the government asked the district court to order an end to the Agreements and to require Westinghouse to license MELCO and MHI under its United States patents.648 F.2d at 646.

The Government's main appeal argument was "that Mitsubishi has become so wedded to Westinghouse technology, because of the Agreements, as to be unable to compete in the United States market," The court responded:

In advancing its theory, however, the government argues that an antitrust violation may be found where a patent holder does precisely that which the patent laws authorize. Westinghouse has done no more than to license some of its patents and refuse to license others. . . , The right to license that patent, exclusively or otherwise, or to refuse to license at all, is "the untrammeled right" of the patentee. In short, in granting MELCO and MHI some licenses but not others, Westinghouse did no more than employ means "normally and reasonably adapted to secure pecuniary reward for the [patent] monopoly."648 F.2d at 647 (citations omitted).

By the same token, the Government's theory that:

[B]ecause Westinghouse has, in effect, burdened Mitsubishi with its foreign patent licenses, thus tying it to Westinghouse technology, Westinghouse should now be required to license its United States patents to Mitsubishi, so that Mitsubishi can compete in the United States . . . flies in the face of the rule that a holder of United States patents has a right to refuse to license them.648 F.2d at 648.