source: Caselaw Access Project

author: BARNES, Circuit Judge:

license: Public Domain

text:
    REX CHAINBELT INC., Plaintiff-Appellant (Cross-Appellee), v. HARCO PRODUCTS, INC., dba DFC Company, Defendant-Appellee (Cross-Appellant).
    Nos. 73-2139, 73-2059.
    United States Court of Appeals, Ninth Circuit.
    Feb. 6, 1975.
    As Amended March 31, 1975.

      Alfred H. Plyer, Jr. (argued), Chicago, 111., for plaintiff-appellant.
    Joseph Mueth (argued), Los Angeles, Cal., for defendant-appellee.

       Honorable Martin D. Van Oosterhout, Senior designation. Circuit Judge of the Eighth Circuit, sitting by

   OPINION

Before VAN OOSTERHOUT, BARNES and HUFSTEDLER, Circuit Judges.

BARNES, Circuit Judge:

This action was instituted by appellant Rex Chainbelt Inc. in the Federal District Court for the Central District of California against Harco Products, Inc. for infringement of Rex’s U. S. Patent No. 2,970,783. Harco answered the complaint alleging that the patent was unenforceable because of misuse, and that the patent was void as being “obvious” under 35 U.S.C. § 103. Harco also filed a cross-complaint alleging that Rex’s misuse of its patent and the bringing of this patent infringement suit constituted a violation of § 1 of the Sherman Act in that the patented process was being used to “tie” the sales of an unpatented component used in the process.

The district court found that it had jurisdiction over this contest under both the patent law (28 U.S.C. § 1338) and the antitrust law (28 U.S.C. § 1337).

After a trial on the merits, the court found: (1) the patent in question was void for obviousness under 35 U.S.C. § 103; (2) if the patent were valid, then while Harco had not directly (35 U.S.C. § 271(a)) or contributorily (35 U.S.C. § 271(c)) infringed the patent, they had actively induced others to infringe on the patent (35 U.S.C. § 271(b)); (3) Rex’s sales of an unpatented staple commodity (epoxy resin) accompanied by an implied (can label) license to practice the patent constituted a non de minimis tying arrangement in violation of § 1 of the Sherman Act; (4) that Rex’s tying arrangement also constituted a misuse of its patent (making the patent unenforceable) which misuse was not absolved because Rex had for royalties licensed other manufacturers of epoxy resin to issue “can label” licenses to practice the patent in question; and (5) that Harco has shown no damages to it as a consequence of Rex’s antitrust violation, and was not entitled to attorney’s fees, although costs were awarded.

Both Rex and Harco appeal to this court.

Rex appeals from the decision of the court below holding: 1) that the patent is void for obviousness, and 2) that Rex’s “can label” licensing program constituted an antitrust violation or a misuse of its patent.

Harco appeals the decision of the district court holding that they were not entitled under the antitrust laws to treble the amount of the attorney’s fees which they had expended in defending against the patent infringement suit.

I. Validity of Patent

To provide a background with which to view the arguments as to the validity of the patent, we quote from Rex’s Statement of Facts, which is, as quoted, essentially a conversational version of the facts agreed upon in the Pre-Trial Order (C.T. 1005-1031).

“The patent in suit is concerned with the art of gyratory crushers which are used in the mining and aggregate industry to crush rock, aggregate, minerals, etc. Rex’s predecessor, Nordberg Manufacturing Company, has long been one of the major manufacturers of cone crushers in the United States and throughout the world. . .
“A conventional cone crusher is shown in Figure 5 of the ’783 patent, plaintiff’s exhibit 1 (hereinafter PX .) with material being fed in the top and passing through a crushing cavity that flares outwardly and downwardly. The crushing cavity is defined by an overhanging bowl which opposes a generally conical head. The head itself is mounted for gyratory movement within the bowl so that, as the material being crushed passes through the crushing zone, it is subject to a series of nips or impacts causing it to break and fracture before dropping through the bottom of the machine (CR 1007, Fact 6).
Crushing takes place between the bowl and head and each is provided with a removable wear-taking liner, the upper liner, which is on the bowl, being referred to as the bowl liner, and the lower liner, which is on the head, being referred to as the mantle. The bowl liner and mantle for many years have been made of manganese steel which is a tough metal with high wear-resistant properties. The liner and mantle are often referred to in the trade as “manganese.” When either the bowl liner or mantle or both are worn out, they are removed and replaced with new ones (CR 1007, Fact 7). The bowl liner is held in place by lugs or hooks which project through openings in the bowl while the mantle is held down on the head by a locking sleeve and lock nut (PX 1).
Since crushing impacts are being delivered to the bowl liner and mantle under tremendous force, it is important that these wearing parts be solidly supported in the machine and fully backed in solid contact with the bowl and head so that the crushing impacts will not cause differential stresses between a fully backed area and an unsupported adjacent area in one of the wearing parts. Manganese steel is very difficult and expensive to machine or grind so the practice has been to reduce the amount of contact area to a bare minimum at the bottom, Reporter’s Transcript 313, 314 (hereinafter RT . . .). For years it has been customary to provide a thin cavity or space above the contact area between the back of the liner and mantle and their supporting part, the bowl and head (CR 1008, Fact 9). Molten zinc has been poured into this thin space and allowed to solidify, hoping to obtain a full solid backing of the wearing part. Thus the practice has been for over half a century (CR 1008, Fact 10).
Zincing (as the procedure was called) has, in the best of circumstances, been unsatisfactory and in the worst, disastrous. Molten zinc has a number of very serious disadvantages:
1. It is extremely difficult to handle and pour liquid zinc. Very expensive protective clothing must be worn by the personnel, and serious burns have resulted from spilling and accidents (RT 102, 103, PX 3a — h).
2. The equipment to melt, handle and pour molten zinc is very expensive. . . . (RT 104, PX 3a — h).
3. The zinc shrinks substantially as it solidifies. Even though the space behind the mantle or liner may be full of molten zinc, when it solidifies or freezes, voids will occur due to shrinkage. Striations and unsupported fissures will appear and differential stresses will be caused in the manganese during crushing, resulting in early failure of the wearing parts. (RT 105).
4. The continual pounding from the crushing action and the stretching and twisting of the manganese quite often will cause zinc to powder or granulate early in the life of a mantle or liner, referred to in the trade as “powdering out,” which results in very little, if any, backing during use of the part which inevitably leads to its early failure (RT 105).
5. The problem of molten zinc has long existed in the industry (CR 1018, Fact 72).
With the invention of the ’783 patent, all of the disadvantages of zinc have been overcome and no new difficulties have been encountered. This patentee was the first to suggest the use of an epoxy formulation with very little, if any, solidification shrinkage as the backing for crushing wearing parts. It doesn’t powder out. It has now become standard in the industry practically completely replacing zinc, with other major crusher and parts manufacturers taking licenses, .. The patented subject matter is in use in every mining country in the world (CR 1011, Fact 33) and the old zincing procedure is quite limited in the mining industry and practically non-existent in the aggregate industry (CR 1014, Fact 44).
Claims 1 — 6 of the patent cover a two-element combination, namely a manganese steel wearing part and a backing portion made of an epoxy resin formulation with certain physical characteristics. Claim 7 covers a three-element combination, the above two plus the crusher.” (Rex’s Opening Brief at 4-6.)

35 U.S.C. § 103, under which the district court held Rex’s patent invalid reads:

“§ 103. Conditions for patentability; non-obvious subject matter
A patent may not be obtained though the invention is not identically disclosed or described as set forth in section 102 of this title, if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains. Patentability shall not be negatived by the manner in which the invention was made. July 19, 1952, c. 950, § 1, 66 Stat. 798.”

In the leading case of Graham v. John Deere Co., 383 U.S. 1, 86 S.Ct. 684, 15 L.Ed.2d 545 (1966), the Supreme Court interpreted § 103 so that a decision of obviousness is to be based on a three step analysis.

“Under § 103, the scope and content of the prior art are to be determined; differences between the prior art and the claims at issue are to be ascertained; and the level of ordinary skill in the pertinent art resolved. Against this background, the obviousness or nonobviousness of the subject matter is determined. Such secondary considerations as commercial success, long felt but unsolved needs, failure of others, etc., might be utilized to give light to the circumstances surrounding the origin of the subject matter sought to be patented.” (Id. at 17 — 18, 86 S.Ct. at 694.)

We have little difficulty in determining the first two elements in this test. We have heretofore outlined the most important facts concerning element one, the state of the prior art. We now look to the second element, the difference between the prior art and Rex’s patent.

The crusher structure of the Cheyette (Rex’s) Patent is old and well known as can be seen by a comparison with the Gruender Patent (No. 2,223,956) which was issued in 1940. Indeed, the only difference between the two patents is the substitution of an epoxy backing material for the prior zinc one. (C.T. 1017 # 65, C.T. 1090 # 9.)

At the time of the invention of the process (use of epoxy backing instead of zinc) upon which the Cheyette Patent was based, the properties of epoxy resins were well known. (C.T. 1090 — 91 # 10); including its ability to impregnate and fill voids, to cure at low temperatures, to resist impact and mechanical shock, its low shrinkage, and its extensibility with fillers. (C.T. 1091 # 13.) It should be noted that Rex did not invent a special type of epoxy resin with special properties for use in the process. Nordbak (Rex’s commercial name for its epoxy resin formulation for use as a crusher backing) is an unpatented combination of epoxy resin “extended” by several inert “fillers.” (C.T. 1093-94 # # 33, 36, 37.) The Cheyette Patent does not call for a specific formulation of epoxy resin, although it does mention that certain fillers may be used to obtain a variety of results. What the Cheyette Patent does call for is epoxy resin “having a high dimensional stability and a modulus of elasticity on the order of 1 — 3% of that of steel and a compression strength on the order of from 8 — 10 thousand psi.” (C.T. 1090 # 6.) Epoxy resin of such specifications were well known prior to the Cheyette Patent. (C.T. 1090-91 # 10.)

Viewed in light of the prior art, we must determine whether the substitution of one backing material for another is patentable, or alternatively, whether it was obvious “to a person having ordinary skill in the art.” (35 U.S.C. § 103) (Element three of the Graham test).

As the Court notes in the Graham case, supra, at 17, 86 S.Ct. 684, the requirement of nonobviousness as expressed in 35 U.S.C. § 103 is but a codification of the leading case on the patent-ability of substituted materials: Hotchkiss v. Greenwood, 11 How. (52 U.S.) 248, 13 L.Ed. 683 (1850).

In Hotchkiss the issue was whether the substitution of clay or porcelain for wood or metal as the bulbous part of a doorknob was a patentable invention. The court held:

“[I]n the case before us, the knob is not new, nor the metallic shank and spindle, nor the dovetail form of the cavity in the knob, nor the means by which the metallic shank is securely fastened therein. All these were well known, and in common use; and the only thing new is the substitution of a knob of a different material from that heretofore used in connection with this arrangement.
Now it. may very well be, that, by connecting the clay or porcelain knob with the metallic shank in this well-known mode, an article is produced better and cheaper than in the case of the metallic or wood knob; but this does not result from any new mechanical device or contrivance, but from the fact, that the material of which the knob is composed happens to be better adapted to the purpose for which it is made. The improvement consists in the superiority of the material, and which is not new, over that previously employed in making the knob.
But this, of itself, can never be the subject of a patent. No one will pretend that a machine, made, in whole or in part, of materials better adapted to the purpose for which it is used then the materials of which the old one is constructed, and for that reason better and cheaper, can be distinguished from the old one; or, in the sense of the patent law, can entitle the manufacturer to a patent.
The difference is formal and destitute of ingenuity or invention. * * * * * *
In other words, the improvement is the work of the skilful mechanic, not that of the inventor.” (Id. at 265 — 67, 13 L.Ed. 683.)

We feel that Hotchkiss is controlling of the factual situation present in this case. See in addition, our decision in Griffith Rubber Mills v. Hoffar, 313 F.2d 1 (9th Cir. 1963).

Rex’s principal arguments seeking to distinguish Hotchkiss and its progeny from the instant case are: 1) Rex’s allegation that the discovery that epoxy resin wouldn’t “powder out” was an unusual, surprising and unexpected result, citing: Hewlett-Packard Co. v. Tel-Design, Inc., 460 F.2d 625 (9th Cir. 1972); and Great Atlantic & Pacific Tea Co. v. Supermarket Equipment Corp., 340 U.S. 147, 152, 71 S.Ct. 127, 95 L.Ed. 162 (1950); and 2) that Rex’s process (in the language of the Graham case) filled a “long felt but unresolved need” in the industry, and was “commercially successful.”

Concerning the first argument, Rex assures us that it was truly astounded when it learned that epoxy resin wouldn’t “powder out” when used as a backing material in crushers. In their brief Rex amplifies on this point:

“The ‘synergistic result’ here required by Edoco Products, Inc. v. Peter Kiewit Sons’ Co., 177 USPQ 418 (9th Cir. 1973) is that an epoxy formulation backing will not ‘powder out’, a result totally surprising and completely unanticipated. Harco (DB 45) dismisses this as merely the known impact resistance of epoxy resin. But none of Harco’s evidence, and specifically the exhibits Harco refers to, teaches that epoxies are known not to granulate or powder and there is no evidence that impact resistance has any relationship to granulation or, as we have termed it, ‘powdering out.’ Impact resistance means a material won’t break when struck. Powdering or granulation .goes beyond that. There is a clear difference between breaking on the one hand, and disintegration, on the other. Lots of materials break without disintegrating.” (Rex’s Reply Brief at 2-3.)

We find Rex’s argument specious. It is true that a material which breaks may not disintegrate, but the converse of that statement, and the question before us, seems hardly true. Given the known impact resistance of epoxy resin, which the court finds and both parties admit, it certainly was within the ordinary skill of the art, that from a knowledge that a material had a high impact resistance one would postulate that it also would be a very likely candidate not to “powder out.”

The very cases which Rex cites in support of their first argument weighs against them on the facts of this case. The A&P case supra, the leading statement on the law of combination patents states:

“The conjunction or concert of known elements must contribute something; only when the whole in some way exceeds the sum of its parts is the accumulation of old devices patentable. Elements may, of course, especially in chemistry or electronics, take on some new quality or function from being brought into concert, but this is not a usual result of uniting elements old in mechanics. This case is wanting in any unusual or surprising consequences from the unification of the elements here concerned.....
Neither court below has made any finding that old elements which made up this device perform any additional or different function in the combina-
tion than they perform out of it.
Courts should scrutinize combination patent claims with a care proportioned to the difficulty and improbability of finding invention in an assembly of old elements. The function of a patent is to add to the sum of useful knowledge. Patents cannot be sustained when, on the contrary, their effect is to subtract from former resources freely available to skilled artisans. A patent for a combination which only unites old elements with no change in their respective functions, such as is presented here, obviously withdraws what already is known into the field of its monopoly and diminishes the resources available to skillful men. This patentee has added nothing to the total stock of knowledge, but has merely brought together segments of the pri- or art and claims them in congregation as a monopoly.” (340 U.S. at 152 — 53, 71 S.Ct. at 130.)

As to Rex’s second argument, apart from the fact that we could readily dispose of it on the basis of the contrary finding of fact by the trial court (C.T. 1092 # 24), we note that even if we assume that the epoxy backing did fill a long felt need for crushers users, this is only an indication, and not a prima facie demonstration, of invention. As the Supreme Court said in Anderson’s-Black Rock v. Pavement Salvage Co., Inc., 396 U.S. 57, 90 S.Ct. 305, 24 L.Ed.2d 258 (1969):

“A combination of elements may result in an effect greater than the sum of the several effects taken separately. No such synergistic result is argued here. It is, however, fervently argued that the combination filled a long felt want and has enjoyed commercial success. But those matters ‘without invention will not make patentability.’ Great A. & P. Tea Co. v. Supermarket Corp., 340 U.S. 147, 153 [71 S.Ct. 127, 130, 95 L.Ed. 162].” (Id. at 61, 90 S.Ct. at 308.)

Likewise, Rex’s reliance upon our decision in Reeves Instrument Corp. v. Beckman Instruments, Inc., 444 F.2d 263 (9th Cir. 1971), cert. denied 404 U.S. 951, 92 S.Ct. 283, 30 L.Ed.2d 268 (1971), is misplaced. Looking at the Cheyette crusher as a whole (Cf. Radiator Specialty Co. v. Micek, 327 F.2d 554 (9th Cir. 1964), cert. denied 379 U.S. 821, 85 S.Ct. 41, 13 L.Ed.2d 31 (1964)), we see an improved product but not an innovatively different one. Looking at the problem of finding a suitable means for handling the internal stresses in crushers, in substituting epoxy for zinc we see the development and refinement of an old concept (i. e. a backing material) but not an inventive or new approach to the problem.

In sum, the record discloses ample evidence to support the district court’s finding that Rex’s patent was void for obviousness under 35 U.S.C. § 103.

II. The Antitrust Violation and Patent Misuse Claims

We next review the district court’s determination that Rex’s label licensing program constituted a tying arrangement, per se violative of § 1 of the Sherman Act, and consequently, a misuse of its patent. (Cf. Ansul Co. v. Uniroyal, Inc., 448 F.2d 872, 879-81 (2d Cir. 1971), cert. denied 404 U.S. 1018, 92 S.Ct. 680, 30 L.Ed.2d 666 (1972).)

We agree with the court below that it did.

The findings of the court below relevant to this portion of the appeal are quoted in the margin.

Rex sells its unpatented epoxy crusher backing material (Nordbak) with a “can label” license authorizing the purchaser thereof to use the contents in the practice of Rex’s Cheyette Patent No. 2,970,-783. Rex has never issued a direct license (i. e. one apart from the can label license) to a crusher user to practice the patent, and Rex has no company policy in connection with the issuance of such licenses. (C.T. 1017 # 62.)

Given the fact that the label license is the only apparent way that a crusher user can obtain a license to exercise the Cheyette process, and because no other licensing program for the patent was visibly available, we have little difficulty in holding that there was sufficient evidence from which the trial judge could conclude that a tying agreement was implicit in the label license. (C.T. 1094 — 95 # 40) and that such an arrangement constituted a misuse of the patent. See Leitch Mfg. Co. v. Barber Co., 302 U.S. 458, 58 S.Ct. 288, 82 L.Ed. 371 (1938); B. B. Chemical Co. v. Ellis, 314 U.S. 495, 62 S.Ct. 406, 86 L.Ed. 367 (1942).

This court in Stearns v. Tinker & Rasor, 252 F.2d 589 (9th Cir. 1957), cert. denied 350 U.S. 830, 76 S.Ct. 62, 100 L.Ed. 741 (1955), long ago noted in the patent misuse context:

“The mere fact that an owner of a patented article combines the article with an unpatented article and sells or leases the unit as a whole does not per se prove misuse. The holder of a patent can exploit his legally protected monopoly in the patent as best he sees fit, so long as in doing so he does not restrain competition in the unpatented article. Probably the best way for an owner of such a patent to protect himself from a charge of misuse would be to offer or stand ready to offer the patented item alone.13”
Footnote 13. “If 35 U.S.C.A. § 271 is applicable, perhaps the owner need not even offer or stand ready to sell the unpatented article. This would be where the unpatented part is a non-staple material part of the invention, which is not capable of substantial non-infringing uses.” (Id. 252 F.2d at 604.)

A patentee, such as appellant, who does not affirmatively offer, or express a willingness to offer, a licensing program separate from the label license attached to a staple article of commerce, runs the risk that the court may, in conjunction with the particularized evidence in the case, conclude that a tying arrangement is implicit, and that a misuse of the patent has occurred. Our holding is certainly not intended to rule out or otherwise affect the certain narrow “packaging” “component” or “total product” justifications previously enunciated by the courts for certain marketing techniques which may appear to have the technical appearance of a tying arrangement without the economic coercion. See, e. g., United States v. Jerrold Electronics Corp., 187 F.Supp. 545 (E.D.Penn. 1960), aff’d 365 U.S. 567, 81 S.Ct. 755, 5 L.Ed.2d 806 (1961). We merely indicate that any patentee who sells the patented item only in conjunction with some other unpatented staple good raises serious suspicions of tying behavior and misuse. The users of such marketing programs bear a heavy burden in overcoming this suspicion and in bringing themselves within one of the aforementioned justifications. Additionally we note, that as in the instant case, where there has been a factual determination by the trial court that such an arrangement is indeed coercive tying, that determination will not be easily reviewable, nor likely to be reversed, in this court.

The record discloses that Rex has had a consistent program of bringing patent infringement suits against all other sellers of epoxy resin to be used as backing material for crushers. In doing so Rex has effectively dried up any source of supply which a crusher user might look to, except for Rex and its licensees. (C.T. 1094 # 39.)

Admittedly, Rex has acted attendant to a bona fide belief that it was done in protection of their patent, but the effect upon the tied market has been to restrain commerce in epoxy resins nonetheless. Tying is still a per se violation of § 1.

In short, Rex has exercised the market power attendant to its rights under the Cheyette patent (the tying product) in the epoxy resin market (the tied product). Such power is significant and the amount of commerce affected is not de minimis.

The facts in this case are controlled as to its antitrust aspects by International Salt Co., Inc. v. United States, 332 U.S. 392, 68 S.Ct. 12, 92 L.Ed. 20 (1947); and as to the patent misuse claim by Leitch Mfg. Co. v. Barber Co., 302 U.S. 458, 58 S.Ct. 288, 82 L.Ed. 371 (1938).

The district court did not err in holding that Rex’s can label licensing program violated § 1 of the Sherman Act, and constituted a misuse of its patent.

III. Attorney’s Fees

We turn now to Harco’s appeal from the district court’s holding that Harco could not recover as part of treble damages under the antitrust laws, the attorney’s fees which it incurred in defending against the patent infringement action brought by Rex.

The holdings of the court below, as stated in its findings of facts and conclusions of law (C.T. 1089 — 98), which are relevant to our consideration of this issue, are quoted in the margin.

Harco was unable in the court below to produce any credible evidence that it was damaged by Rex’s antitrust violation (tying). Indeed, Harco concedes this point on appeal (Harco’s Brief at 4). However, Harco urges that the bringing of the infringement action by Rex is per se an action in furtherance of the tying situation and hence under 15 U.S.C. § 15 there would exist damages (i. e. the cost of defending against the patent infringement suit) for which Harco should be allowed to recover threefold the amount. In support of this proposition Harco cites: Kobe v. Dempsey Pump Co., 198 F.2d 416, 424-25 (10th Cir. 1952), cert. denied 344 U.S. 837, 73 S.Ct. 46, 97 L.Ed. 651 (1952); Hazeltine Research, Inc. v. Zenith Radio Corp., 388 F.2d 25, 35 (7th Cir. 1967), aff’d in part, rev’d in part, 395 U.S. 100, 89 S.Ct. 1562, 23 L.Ed.2d 129 (1969); Clapper v. Original Tractor Cab Co., 270 F.2d 616, 623-24 (7th Cir. 1959), cert. denied 361 U.S. 967, 80 S.Ct. 588, 4 L.Ed.2d 547 (1960); Switzer Brothers Inc. v. Locklin, 297 F.2d 39 (7th Cir. 1961), cert. denied 369 U.S. 851, 82 S.Ct. 934, 8 L.Ed.2d 9 (1962); and to which list we add: Dairy Foods, Inc. v. Dairy Maid Products Coop., 297 F.2d 805 (7th Cir. 1961); which ease succinctly declares:

“Where an infringement suit is brought as part of and in furtherance of a combination and conspiracy which violates the antitrust laws and results in injury such as is here alleged the person injured may recover threefold the damages he sustains. Clapper v. Original Tractor Cab Company, 7 Cir., 270 F.2d 616; Kobe, Inc. v. Dempsey Pump Co., 10 Cir., 198 F.2d 416, 424-425. And each of these cases is authority for the recovery of threefold the cost and expense of defending such an infringement suit.” (Id. at 809.)

We agree with the holdings in the above cases, but feel that Harco’s reliance upon them to create a per se right to treble attorney’s fees in all combination patent-infringement-antitrust actions is misfounded, and based on a misreading of the relevant precedents.

The Report of the Attorney General’s National Committee to Study the Antitrust Laws (1955) at 247 — 48 analyses and balances the policy and issues on both sides, and properly states the law in this area. We quote therefrom:

“5. Infringement Suits.
The usual means of enforcing patent ' rights is by direct infringement suit. One or numerous infringement suits, by themselves, constitute no antitrust violation. Infringement suits may, on the other hand, play a part in an overall plan to unduly restrain or monopolize commerce. Threats of suit under a group of narrow and weak patents may be potent to harass and deter competition.
In Kobe v. Dempsey the court found a plan of monopolization of the rodless pump industry by buying up all the present and future patents in the field and obtaining covenants from the sellers not to compete. The infringement suit against Dempsey, the court noted, was a part of the plan to eliminate Dempsey as a competitor. Moreover, the court found a persistent effort to eliminate Dempsey by a customer boycott in connection with the suit. Treble damages were awarded to Dempsey on the ground that the court should not be a ‘vehicle for maintaining and carrying out an unlawful monopoly.’ To deny recovery, the court said, ‘would permit a monopolizer to smother every potential competitor with litigation’ and ‘leave the competitor without a remedy.’
More recently the same court distinguished the Kobe case in Cole v. Hughes Tool Co., 215 F.2d 924, where it reiterated that a good faith patent infringement suit, though the patent was held invalid, did not violate the antitrust laws. The court noted, that in contrast Kobe involved a situation where monopoly was obtained by patent purchases and the infringement suit itself was an integral part of the scheme of monopolization.
We concur with the Kobe decision when so regarded. For there is obvious merit in holding that where the evidence clearly established damages resulting from the infringement suit or it was brought in bad faith as part of an agreement or plan violative of the antitrust laws, treble damages should be awarded. However, we consider it equally important not to imperil free access to the courts for determination and protection of patent rights.

Accordingly we make the following recommendations:

a. Where it is shown that an infringement suit has, in fact, been brought as an integral part of an agreement or plan to violate the antitrust laws and that the defendant sustained resulting damages, treble damages for antitrust violation should be recoverable, whether or not there was a colorable claim of infringement.” (Id. at 247-48.)

In those cases which have awarded as part of antitrust treble damages, attorney’s fees incurred in defending patent infringement actions, we see the consistent thread of the patent infringement suit being used with ulterior motives as a predatory means — an aggressive weapon to attain some other anticompetitive end — •, as opposed to its being used as a defensive shield with which to protect the patent interests.

The language of the Kobe case, supra, is instructive as to this distinction:

“It is said that to allow recovery of damages resulting from the infringement action would be a denial of free access to the courts. We fully recognize that free and unrestricted access to the courts should not be denied or imperiled in any manner. At the same time we must not permit the courts to be a vehicle for maintaining and carrying out an unlawful monopoly which has for its purpose the elimination and prevention of competition. The trial court found that Kobe did not institute the infringement action in bad faith but believed that some of its patents were infringed, and that Kobe intended to secure a judgment which would eliminate defendants as competitors and to remain in exclusive possession of the whole of the interstate markets for deep well hydraulic pumps for oil wells. The trial court also found that the infringement action and incidental activities by Kobe were intended and designed to further the existing monopolistic purposes.
We have no doubt that if there was nothing more than the bringing of the infringement action, resulting damages could not be recovered, but that is not the case. The facts as hereinbefore detailed are sufficient to support a finding that although Kobe believed some of its patents were infringed, the real purpose of the infringement action and the incidental activities of Kobe’s representatives was to further the existing monopoly and to eliminate Dempsey as a competitor. The .infringement action and the related activities, of course, in themselves were not unlawful, and standing alone would not be sufficient to sustain a claim for damages which they may have caused, but when considered with the entire monopolistic scheme which preceded them we think, as the trial court did, that they may be considered as having been done to give effect to the unlawful scheme.” (Kobe, supra, 198 F.2d at 424-25.)

The mere coincidence of an antitrust violation and a patent infringement suit is not sufficient to entitle Harco to attorney’s fees expended in defense of the patent infringement claim absent some showing from which the trial court can find, or infer, that the patent infringement suit was brought in furtherance and as an integral part of a plan to violate the antitrust laws. See La Salle Street Press, Inc. v. McCormick & Henderson, Inc., 445 F.2d 84 at 96 (7th Cir. 1971); American Infra-Red Radiant Co. v. Lambert Ind. Inc., 360 F.2d 977 at 996-97 (8th Cir. 1966), cert. denied 385 U.S. 920, 87 S.Ct. 233, 17 L.Ed.2d 144 (1966).

This distinction was recently applied by the Second Circuit in an able opinion by Judge Lumbard which held:

“Plaintiff Ansul argues that it is entitled to recover treble for its expense incurred in defending Uniroyal’s patent infringement suits against it and against the various distributors which it had agreed to indemnify. Ansul contends that these suits were part of Uniroyal’s endeavors to perpetrate its unlawful market scheme, for, as the trial court found, ‘these suits together with Úniroyal’s other activities . . . had the effect of perpetuating the price and market stabilization achieved through its earlier violations of § 1 of the Sherman Act . . ..’ 306 F.Supp. at 567. Hence, it argues, its expenses in defending those suits are properly recoverable under Hazeltine Research, Inc. v. Zenith Radio Corp., 388 F.2d 25, 35 (7th Cir. 1967), aff’d in part 395 U.S. 100, 89 S.Ct. 1562, 23 L.Ed.2d 129 (1969), where the court stated: ‘Zenith’s expenses in defending the infringement suit brought pursuant to HRI’s antitrust violations are a proper subject of threefold recovery.’ Judge Mansfield, after making the statement quoted above as to the effect of these suits, then rejected Ansul’s contention stating that
‘even though the suits were one of many activities which collectively had the effect of inhibiting an effective purge of [Uniroyal’s] earlier misconduct, they were instituted by it in good faith and for the purpose of resolving the issues of validity and infringement rather than with the intent or purpose of restraining trade in violation of the Sherman Act. Thus Uniroyal’s suits must be distinguished from those brought in furtherance of an antitrust conspiracy . . ..’ 306 F.Supp. at 567.
Ansul argues that intent is not necessary to a Sherman Act § 1 violation and that whatever its actual intent may have been, Uniroyal as a proven antitrust violator is conclusively presumed to be responsible for the direct consequences of its acts. Hence, according to Ansul, even if the intent of Uniroyal’s suits was legitimate, the fact that their effect was to further the unlawful conspiracy makes them part of that conspiracy and thus allows Ansul to recover treble its expenses in defending them.
We agree with the result reached by the district court. A patentee who has reasonable grounds for believing that his patent is valid and that it is being infringed should not lightly be precluded from availing himself of the courts.”

Ansul Co. v. Uniroyal Inc., 448 F.2d 872 at 882 (2d Cir. 1971), cert. denied, 404 U.S. 1018, 92 S.Ct. 680, 30 L.Ed.2d 666 (1972).

The institution of a patent infringement suit when the patent also is the tying product is not necessarily or always an action brought in furtherance of the illegal tying situation. Mere coexistence of a tying situation and the patent infringement suit is not sufficient to demonstrate that the suit was brought in furtherance, or as an integral part of a plan to violate the antitrust laws. Tying is a per se violation of Section 1 of the Sherman Act. Purely negligent and unintentional acts can and do constitute violations ■ of the antitrust laws if they have, or are presumed at law to have, the required anticompetitive economic effect. The focus of the antitrust laws is not upon the intentions of the actor, but rather upon the effect of the actions upon commerce. Hence, we can have the situation of a patentee who is unintentionally or negligently in violation of the antitrust laws 1) bringing an infringement suit to protect his rights under a valid patent (or a patent he in good faith believes to be valid) and 2) believing in good faith that he is neither misusing his patent nor violating the antitrust laws. In cases such as the one just illustrated we cannot say that the patent infringement suit is brought in furtherance of an antitrust violation. Whether the case sub judice falls into this classification we cannot determine from the record on appeal. We therefore remand to the district court for a determination of whether Rex brought this infringement suit in furtherance of the antitrust violation.

The court below held: “plaintiff has not been guilty of bad faith or inequitable or unconscionable conduct in the prosecution of this action.” (C.T. 1096.) But, from this holding we cannot determine whether 1) Rex merely had a good faith belief in the validity of its patent, but was intentionally using its patent in furtherance of a tying scheme (cf. Kobe, supra); or 2) whether Rex not only in good faith believed that its patent was valid, but also believed that it was not misusing its patent or violating the antitrust laws. On remand, if the district court finds the former situation existed, damages should be awarded based on the basis of an antitrust violation. If the court below finds the latter, then they should not be awarded under the antitrust laws.

Harco is not entitled to recover reasonable attorney’s fees under the patent laws (35 U.S.C. § 285). Indeed, Harco practically admits his point on appeal. Quoting from Harco’s Reply Brief at p. 5.:

“[Ajttorney fees may be awarded to the prevailing party in ‘exceptional’ patent cases under 35 U.S.C. § 285. Decisions by this court in patent cases have indicated that there must be a showing of palpable fraud, bad faith, unfair conduct by a party or its attorney, or some other consideration of similar force which makes it grossly unjust for the winning party to bear its attorney fees. Dow Chemical v. Dart Industries, Inc., 475 F.2d 124 (CA9 1973); Florida Brace Corp. v. Bartels, 332 F.2d 337 (CA9 1964); Park-in-Theatres, Inc. v. [Perkins] Parkins, 190 F.2d 137 (CA9 1951). Such an award is primarily a matter for the exercise of district court discretion. Bates Industries Inc. v. Daytona Sports Co., 441 F.2d 1110 (CA9); Ashcroft v. Papermate Mfg. Co., 434 F.2d 910 (CA9 1970).” (Emphasis added.)

In the instant case the district court explicitly found that this was not “an extraordinary or exceptional case” warranting an award of reasonable attorney’s fees under the patent law. (C.T. 1096, 1098.)

We hold that the district court did not err in construing the patent laws in denying Harco’s prayer for attorney’s fees.

This case is remanded to the district court for a determination of whether Harco is entitled to attorney’s fees under the antitrust laws, in accordance with the tests set forth in this opinion. In all other respects, the decision of the district court is affirmed.

      . (C.T. 1094-98)
      (Findings as numbered)
      “34. Epoxy resin with additives of the type involved in this case, as exemplified in “Rockfill” and “Nordbak” is a staple article of commerce having substantial non-infringing uses.
      * * St! * * 38. Plaintiff-counterdefendant sells, and since at least April 28, 1960, has sold “Nordbak” epoxy resin to crusher users with directions for using the same in the practice of United States Letters Patent No. 2,970,783, and an implied license under said patent has accompanied the sale of every can of “Nordbak.” “Nordbak” is sold with the instructions and directions as shown by Plaintiffs can labels and brochures for using the backing material in the practice of the alleged invention claimed in United States Letters Patent No. 2,970,783. Plaintiff does not identify or otherwise specify any portion of the sales price of the epoxy sold under the name “Nordbak” as being a royalty and it does not demand payment of royalties from purchasers of backing material sold under the name “Nordbak” or otherwise require an accounting to it for the practice of the alleged invention covered by said patent.
      39. Plaintiff-counterdefendant has brought actions for infringement of Patent No. 2,970,-783 against each supplier of epoxy resin products competing with “Nordbak,” which actions have resulted either in a settlement and a license to the competitor, or the competitor’s stopping competitive sales.
      40. Each of the Plaintiffs licensees sells epoxy resin to crusher users under circumstances which imply a license under Patent No. 2,970,783 with every can of epoxy resin sold.
      41. Defendant began selling its epoxy resin under the name “Rockfill” in 1970 and since that time Plaintiff and Defendant have been direct competitors in the sale of epoxy resin to crusher users.
      42. Prior to the filing of the present action, Defendant requested a license under Patent No. 2,970,783 from Plaintiff. Plaintiff did not offer Defendant a license under Patent No. 2,970,783 until after the filing of Defendant’s antitrust counterclaim herein, and then offered a license at a royalty rate four times greater than the royalty rate provided in the Plaintiffs other licenses.
      43. The sales of “Nordbak” with said implied license to practice Patent No. 2,970,783 constitute tying contracts between Plaintiff and crusher users buying “Nordbak” from it.
      44. The tying item is the right to practice Patent No. 2,970,783 which accompanies each, can of “Nordbak.” The requisite economic power in the tying item is provided by the purported Patent No. 2,970,783.
      45. The tied item is epoxy resin, and the relevant market and line of commerce herein affected is the national market in epoxy resin.
      46. The sales of “Nordbak” epoxy resin to crusher users in the above-described manner have been substantial, exceeding Five Hundred Fifty Thousand ($550,000) Dollars in 1971.
      47. The effect of Plaintiff-counterdefendant’s tie-in sales of “Nordbak” with an implied license and its infringement actions has been to restrain trade and to substantially lessen competition in the sale of epoxy resin to crusher users in violation of Section 1 of the Sherman Act, Section 1, Title 15, United States Code.
      48. Defendant is entitled to an injunction against the continuation of said antitrust violation pending the within adjudication of the invalidity of the patent in suit becoming final. When the said finding of invalidity becomes final, no further injunction will be required. If Patent No. 2,970,783 is later found to be valid, Defendant shall be entitled to a permanent injunction.
      49. Plaintiff by its use of Patent No. 2,970,783, as set forth in Findings 31-47, has misused said patent, rendering the patent unenforceable.”

      . Rex is correct in its contention that the fact that no one has yet asked them for a direct license (and consequently no one was refused one) is evidence that there is no economic tying effect or misuse present. Federal Sign & Signal Corp. v. Bangor Punta Op. Inc., 357 F.Supp. 1222 at 1240 (S.D.N.Y.1973); Ansul Co. v. Uniroyal Inc., 306 F.Supp. 541, 562-63 (S.D.N.Y.1969), 448 F.2d 872 (2d Cir. 1971), cert. denied 404 U.S. 1018, 92 S.Ct. 680, 30 L.Ed.2d 666 (1972); however, it is not conclusive of the point. It is merely one factor to be considered by the district court. E. g

      “At the oral argument it seemed to me that the method of business adopted by the plaintiff in the case at bar could not be considered objectionable in the absence of a finding that the plaintiff had. refused or would refuse to grant an unrestricted license to any shoe manufacturer who chose to buy from some other source the materials used in reinforcing the insoles by the patented process. That is, if the plaintiff is prepared to grant an unrestricted license on a royalty basis to any shoe manufacturers who prefer to obtain the unpatented precoated duck and top coat elsewhere, it is difficult at first blush to see how the plaintiff would be doing anything wrong in furnishing the unpatented materials and incidental services at so much per web yard of duck to those shoe manufacturers who prefer to do business with the plaintiff on that basis. But this point was urged in Leitch Mfg. Co. v. Barber Co., supra, and it was pointed out in the plaintiff’s brief before the Supreme Court that the plaintiff was ‘not shown to have refused to grant any license under the patent, much less granted any license conditioned on purchase of emulsion from it.’ The argument was to no avail. The court considered it sufficient to condemn the plaintiffs method of doing business, that, as matters stood, no road contractor had a license to practice the patented process except those contractors who bought their bituminous emulsion from the plaintiff.”
      B. B. Chemical Co. v. Ellis, 117 F.2d 829 at 838 (1st Cir. 1941) (Magruder, C. J., concurring), aff’d 314 U.S. 495, 62 S.Ct. 406, 86 L.Ed. 367 (1942).

      . There is ample evidence in the record to support the district court’s finding that “Nordbak” was a staple commodity. It is well settled that the mere addition of extenders to a staple article does not make the article nonstaple. Dr. Salsbury’s Laboratories v. I. D. Russell Co., 212 F.2d 414 (8th Cir. 1954), cert. denied 348 U.S. 837, 75 S.Ct. 50, 99 L.Ed. 660 (1954). There the court held that the addition of other dilutive ingredients to a staple article of commerce does not cause the article “to lose its characteristics as a common raw material.” (212 F.2d p. 416) This is particularly true here since the extenders are not “components” of the invention. The epoxy resin present in “Nordbak” is the only component of the patent at issue and that is a staple article of commerce.

      . In oral argument counsel for Rex argued that crusher users have an alternative to the can label license in that users can purchase a new crusher from Rex. In view of the fact that the backing material in a crusher will wear out many times during the life of a crusher, we hardly think that being required to purchase an expensive new machine when the backing wears out is a viable alternative to the can label license. A great economic disparity in alternatives will just as effectively create or enforce a tie as the absence of choice. Rex argues that if it wanted to, under the patent laws, it could sell the crusher alone, and not grant can label licenses. This may well be so, but Rex has not chosen to follow this course. A patentee has a privilege to exploit its patent, but this privilege does not encompass tying. Tying is disapproved because of its anticompetitive effects upon the market of the tied product. If Rex had chosen to sell crushers alone, an affect on a tied market would be absent; but as it stands now, the can label licensing program adopted by Rex, by effectively and practically foreclosing and limiting the sources to which crusher users may look to purchase staple epoxy resin, has substantially burdened competition in the market of that tied product.

      . Rex’s licensees are producers of epoxy resin whom Rex has in the past sued for contributory infringement and with whom it has settled. This is further evidence of the effect upon the tied market. Rex has in effect achieved the result that it is licensing its licensees to produce epoxy resin for use in its patent process. That is, part of the royalties are derived not from the right to practice the patent, but rather from the right to sell unpatented epoxy resin (the tied product).

      . (C.T. 1092, 1096-98)
      (Findings as numbered)
      “27. Assuming the patent were valid, then Defendant has, by its bulletin for epoxy resin sold under the name “Rockfill,” and its can labels actively induced Livingston-Graham Inc., a purchaser of said epoxy resin from Defendant, to directly infringe U. S. Patent No. 2,970,783. Defendant has actively induced infringement under Section 271(b), Title 35, United States Code. ******
      50. Defendant has failed to meet its burden of proof that it has been damaged by plaintiffs antitrust violation. There is no credible evidence that defendant has been damaged by plaintiffs conduct up to this time. There is no credible evidence that defendant has lost any customer or failed to gain any other customer that it could have reasonably expected to gain, because of any act of plaintiff. There is no evidence that plaintiff has sued or even threatened to sue any customer or potential customer of defendant.
      51. This is neither an extraordinary nor an exceptional case, and defendant is not entitled to recover its attorney’s fees under either the antitrust or patent aspects of the case. Plaintiff has not been guilty of bad faith or inequi-' table or unconscionable conduct in the prosecution of the action.
      52. Defendant is entitled to recover its costs.
      ****** From the foregoing facts the Court concludes:
      [Conclusions as numbered]

        7. If the patent is valid, Defendant has actively induced infringement of the patent by crusher users, Section 271(b), Title 35, United States Code.
      ****** 14. Defendant has failed to prove that it has been damaged by the antitrust violations and no damages are awarded, Richfield Oil Company v. Karseal, 271 F.2d 709 (CA9 1959).
      15. This is not an exceptional case, and no attorneys fees are awarded, Section 285, Title 35, United States Code.”


author: DYER, Circuit Judge:

text:
    ESTATE of Maurice FRANKEL et al., Plaintiffs-Appellants. v. UNITED STATES of America, Defendant-Appellee.
    No. 74-1958.
    United States Court of Appeals, Fifth Circuit.
    May 8, 1975.

      Marvin K. Collie, Carl Estes, II, G. Edward Ellison, Vinson, Elkins, Searles, Connally & Smith, Houston, Tex., for plaintiff s-appellants.
    Anthony J. P. Farris, U. S. Atty., Mary L. Sinderson, Asst. U. S. Atty., Houston, Tex., Scott P. Crampton, Asst. Atty. Gen., U. S. Dept, of Justice, Washington, D. C., Howard A. Weinberger, Tax Div., Dept, of Justice, Dallas, Tex., Meyer Rothwacks, Chief, App. Sec., Ernest J. Brown, Jonathan S. Cohen, Dennis M. Donohue, Tax Div., Dept, of Justice, Washington, D. C., for defendantappellee.
    Before DYER, MORGAN and GEE, Circuit Judges.
   DYER, Circuit Judge:

A production payment is the right to receive a specified share of the production from the mineral in place, or its proceeds, if, as and when such production occurs. At his death, Maurice Frankel owned an undivided 17/96 interest in an oil production payment attributable to several Louisiana oil properties. The dispute before us on appeal is whether, for estate tax purposes, this payment should be valued at its full unrecouped face amount or reduced by a factor of 6% per annum to reflect the risks involved in owning such investments. By comparing the production payment to a note and utilizing regulations applicable to such instruments, the district court sustained the Commissioner’s determination that the value of the payment was its entire unrecouped principal balance, and denied the estate’s claim for refund. However, we find that the analogy employed by the district court was inappropriate in the context in which it was used and induced a clearly erroneous result. We therefore reverse.

On August 1, 1960, Frankel and others conveyed certain oil and gas leases on Louisiana lands to the Berkshire Oil Company, retaining at the time of conveyance a production payment payable out of 70% of the oil production from the properties. This payment, which was to bear interest at the rate of 6% per annum from October 1, 1960, had a face value of $8,000,000; Frankel’s interest was an undivided 17/96 or $1,416,666.67.

Frankel died on June 27, 1964. In accordance with the then-existing § 2032 of the Internal Revenue Code of 1954, his executors chose to value the estate’s assets as of June 27, 1965, one year after Frankel’s death. As of that date, the production payment had been reduced by $692,921.23, leaving an unpaid principal balance of $723,735.44.

Following the filing of the estate’s tax return, the Commissioner assessed a deficiency against the estate in the amount of $131,980.05 plus interest stemming primarily from the dispute which is the subject matter of this appeal. The estate paid the assessment and filed a timely claim for refund. Following the denial of its claim, this refund suit was instituted in district court.

At trial, it was stipulated that the sole matter in dispute was the fair market value of the production payment as of June 27, 1965. The evidence presented during trial to the court on this issue consisted of the testimony of one expert witness and professional appraisals of the mineral properties subject to the production payment prepared in 1960, 1964, and 1965. These appraisals were unanimous in concluding that the reserves were sufficient to retire an $8,000,000 production payment, but differed as to the date of expected payout. The 1960 report predicted that payout would occur in 1970, while due to an unanticipated slowing of production, the 1965 report concluded that the payment would not be retired until 1976.

The estate also offered the expert testimony of Mr. Gaston, a petroleum engineer who had assisted in the preparation of the 1965 appraisal report. Gaston testified in some detail both as to the uncertainties involved in estimating the reserves on the specific properties subject to this production payment and to the risks inherent in owning oil and gas properties generally. He further stated his opinion that, based on the 1965 report which he had helped to prepare, the production payment on June 27, 1965, had a fair market value of between $475,000 and $512,000. Gaston explained that he had arrived at this range of values by discounting the unpaid principal balance as of that date, $723,735.44, by a factor of 6% per annum to compensate for “the risks attendant to owning oil and gas properties.”

The government presented no witnesses, and rested after cross-examining Gaston and introducing into evidence the 1960 appraisal report which estimated payout in 1970. Taking the matter under submission, the trial court subsequently issued findings of fact and conclusions of law sustaining the Commissioner.

All parties agree that the ownership of an oil production payment entails some risks. Since the payment is secured solely by as yet unexploited reserves, the most obvious element of risk is that estimates of sufficient quantities of the mineral to retire the payment will in fact prove inaccurate. However, other risks are involved even when the reserves are apparently sufficient. For example, a number of factors may affect the rate of production, ranging from mechanical failures or acts of God in connection with the wells to the inability or unwillingess of the holder of the working interest to develop the property more quickly. These factors are relevant because a slower rate of production dictates that a larger amount of production will be consumed by interest payments rather than applied to principal. Finally, there are hazards which are unrelated to the specific mineral property, such as the risk that the market price for the mineral will decline.

Whether these facts justify the “risk discount” contended for by the estate, however, must be determined in the context of the pertinent estate tax regulations, which are binding provided they “implement the congressional mandate in some reasonable manner.” United States v. Correll, 1967, 389 U.S. 299, 307, 88 S.Ct. 445, 450, 19 L.Ed.2d 537.

The fundamental principle of valuation established by the estate tax regulations is “fair market value,” which is defined as “the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” 26 C.F.R. § 20.2031-l(b).

Two recent Tax Court decisions in our view firmly establish the principle that consideration of risk is an appropriate and perhaps necessary element in valuing oil and gas interests under this standard. In Earl Hightower, 1972, 31 T.C.M. 1250 and L. L. Stanton, 1967, 26 T.C.M. 191, the Tax Court considered the valuation of partial working interests in oil and gas properties for charitable deduction purposes, which under pertinent regulations was to be determined by reference to precisely the same “willing buyer-willing seller” test applicable to estate taxation. In both cases, the government successfully contended that, to ascertain the “fair market value” of the interests as defined in the regulations, the projected future net income from the properties must be discounted to reflect the risk that the full amount of projected income would not be realized.

As the court observed in Stanton, supra, 26 T.C.M. at 200:

Market value of property of the type here involved is defined by the regulations to be “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” Sec. 1.170 — 1(c), Income Tax Regs. In view of the uncertainties unvolved in the recovery of oil and gas over a period of time it seems clear that fair market value could not be the same as the present value of estimated net revenue. The buyer would certainly seek some profit on his investment commensurate with the risk involved.

Although in light of the facts and law previously discussed we must conclude that the trial court’s finding that “no facts were introduced which established that the value of the production payment was lower either in 1960 or on the alternate valuation date in 1965 than the unpaid balance due” was “clearly erroneous,” F.R.C.P. 52(a), we think that the focus of our disagreement with the district court is primarily as to controlling legal principles rather than facts.

While recognizing the relevance of the “willing buyer-willing seller” standard of valuation, the district court explicitly adopted the government’s theory that an interest in an oil production payment is for all relevant purposes the functional equivalent of a note owned by the decedent at death. Working from this premise, the court went on to apply the estate tax regulation dealing with valuation of notes, 26 C.F.R. § 20.2031-4, which provides in pertinent part:

The fair market value of notes, secured or unsecured, is presumed to be the amount of unpaid principal, plus interest accrued to the date of death, unless the executor establishes that the value is lower or that the notes are worthless. ... If not returned at face value, plus accrued interest, satisfactory evidence must be submitted that the note is worth less than the unpaid amount (because of the interest rate, date of maturity, or other cause), or that the note is uncollectible, either in whole or in part (by reason of the insolvency of the party or parties liable, or for other cause), and that any property pledged or mortgaged as security is insufficient to satisfy the obligation.

The regulations setting forth the “fair market value” standard themselves caution against overbroad application of the regulations governing specific types of property in preference to the general “willing seller-willing buyer” test. The dangers inherent in such an approach becomes apparent in this case, in which we conclude that the net effect of strained analogy was an incorrect result.

As we read § 20.2031-4, it embellishes the “willing buyer-willing seller” test with an assumption that, while generally true with regard to normally encountered varieties of notes, is inaccurate with respect to a production payment. This assumption is that the risk of nonpayment is one of the factors reflected in the rate of interest charged on the note. Once this premise is accepted, it becomes reasonable then to assume, as the regulation does, that the allowance for risk expressed in the note’s interest rate is presumptively adequate and that to justify a further discount, the estate should be required to introduce specific facts showing that the risk factor was inadequately compensated for ab initio (possibly because the loan was not negotiated at arm’s length), or has become so through intervening circumstances.

However, the assumption that the rate of interest carried by a note contains an allowance for risk is itself based on the assumption that, by accepting the note, the lender is assuming risks that he previously did not bear. It is at this point that the analogy between a production payment and a note breaks down. When Frankel transferred his leasehold estate to Berkshire Oil Company, retaining an obligation payable solely out of the production attributable to these leases, he in effect conditioned his right to receive the production payment on almost precisely the same risks, i. e. inadequate reserves, unfavorable market conditions, etc., he had borne as owner of the leasehold interest. Since Frankel assumed almost no new risks by retaining the production payment, it follows that we cannot look to the interest rate carried by the production payment to reflect these risks.

The theoretical “willing buyer” posited by the regulations, however, stands in a far different position than Frankel. Since he is presumed to be a disinterested outsider with no previous connection to the property, his hypothetical purchase of the production payment would necessarily require the assumption of risks he did not previously bear. Since the interest rate carried by the production payment does not reflect these risks, the “willing buyer” must be compensated by an appropriate discount from face value.

In Bar L Ranch, Inc. v. Phinney, 5 Cir. 1970, 426 F.2d 995, we noted in a different context that

[i]n determining fair market value . commercial realities must be given due consideration. . . . Especially is this so where, as here, testimony shows that the Internal Revenue Service merely assumed, without investigation, that the face value represented the fáir market value. Although a valuation at face may be a reasonable starting place, such a valuation will be held to be arbitrary if evidence of commercial realities is introduced which shows that the valuation is clearly excessive. Id. at 1000.

The net effect of the district court’s holding here was that a “willing buyer” would purchase an obligation entailing substantial elements of risk to obtain, at some uncertain date in the future, the return of his capital plus a rate of interest comparable to that available on a bond. We think this holding conflicts not only with the commercial realities of the situation, but with the pertinent estate tax regulations governing valuation, as interpreted in Stanton and Hightower.

We therefore reverse and remand with directions that the Frankel estate’s interest in the oil production payment be valued at $512,000.

Reversed and remanded with directions.

      . For decedents dying after December 31, 1970, the alternate valuation date for estate assets is six months after death. 26 U.S.C.A. § 2032 (Supp.1975).

      . Certain other items originally contested were conceded by the government prior to trial.

      . A production payment by definition must have an expected economic life shorter than that of the mineral estate it burdens. If the estimates of reserves indicate that the interest will not pay out, it is a royalty interest rather than a production payment. United States v. Morgan, 5 Cir. 1963, 321 F.2d 781.

      . Viewed from the perspective of the current “energy crisis,” it is difficult to now see this as a serious concern. However, in 1965 the Interior Department held hearings on the advisability of continuing the mandatory oil import program which served to support the domestic oil price. 30 Fed.Reg. 1012 (1965).

      . “The valuation of any property not specifically described in §§ 20.2031-2 to 20.2031-8 is made in accordance with the general principles set forth in 20.2031-1.” 26 C.F.R. § 20.-2031-9 (emphasis added).

      . The general validity of this principle can be seen in the hierarchy of commercial loan rates, which range upward from the “prime rate” charged the soundest borrowers.

      . Applying these assumptions to the facts before the district court, it is easy to see how that court reached the result it did. Frankel and his partners had accepted a 6% rate of interest as part of a transaction which no one suggested was other than arm’s length. Moreover, the estate’s expert testified that 6% was a “going rate” of interest for production payments in both 1960 and 1965. Finally, there was no substantial argument that payout of the production payment became less certain between 1960 and 1965, as Gaston also testified that estimates of reserves become more accurate as the fields acquire a production history on which to base projection. If one assumes that the interest rate charged contains an allowance for risk, it becomes obvious that no further discount would be warranted on these facts.

      . A minor exception is that, by accepting a production payment, Frankel did assume the risk that the transferee of the working interest would be unable or unwilling to develop the property at the anticipated rate. This element of risk is included in the interest rate carried by the payment.

      . Gaston, the estate’s expert, testified in some detail to the distinction we have drawn between the interest rate carried by a production payment and its risk factor.
      Q. Do you know any facts whatsoever that would establish the six percent did not accurately reflect the risk for the production payment when it was made in 1960?
      A. Well, the interest on the production payment has nothing to do with risk, as I mentioned a while ago. The risk would come into a prospective buyer of this production payment who has no other deal involved in this thing other than to buy the production payment.

        Now, Mr. Frankel might have made some kind of a side deal, or might have gotten a lot of extra money, cash. We don’t know that.
      Q. That is just conjecture, is that right?
      A. That’s right. We don’t know that. We can’t evaluate that, but what we can evaluate is what an outsider coming in without any other strings attached would give for this production payment at this particular time in evaluating the risk involved and whether he would receive any money back and what return he would receive on that money.
      Q. My question, Mr. Gaston, is essentially, is this: Did anything occur in your opinion in 1960 when a production payment was made at six percent, and in 1965 when you think fifteen percent would have been proper, anything happen in the field that would have caused that increase?
      A. No, sir. In fact, I would have said in 1960 anybody buying the production payment would also want fifteen percent return on it.
      Q. All right.
      A. I did not say six percent was right at one time and six was wrong at another. I think anyone purchasing this production payment at any of those times would have wanted a return over and above six percent on his money for the risk involved. Tr. at 43-45.
      His efforts were not completely successful, because the trial court ultimately distinguished his testimony on the grounds that his opinion as to the propriety of a risk discount “conflict[ed] with his evidence that 6 percent was ‘the going rate’ for such production payments both in 1960 and 1965.”

      . While we think it clear that the district court reached the conclusion which it did because of what we find to be an erroneous view of the nature of a production payment, the government alternatively urges that we affirm on the ground that the estate failed to meet its twin burden of demonstrating that the Commissioner erred in his determination of tax liability and the amount of the error. Crosby v. United States, 5 Cir. 1974, 496 F.2d 1384, 1390. We have considered the arguments advanced in this regard and find them unpersuasive.

      . As the highest valuation figure testified to by the estate’s expert, this represents the lowest figure as to which the estate has carried its burden of establishing the correct valuation. Crosby, supra, n 10.


author: COLEMAN, Circuit Judge:

text:
    Dalila Pardo de SARIC, et al., Plaintiffs-Appellants, v. MIAMI CARIBE INVESTMENTS, INC., et al., Defendants-Appellees.
    No. 74-1870.
    United States Court of Appeals, Fifth Circuit.
    May 9, 1975.
    F. Lawrence Matthews, Miami, Fla., for plaintiffs-appellants.
    James S. Usich, Coral Gables, Fla., for defendants-appellees.

      Before TUTTLE, COLEMAN and SIMPSON, Circuit Judges.
   COLEMAN, Circuit Judge:

Appellants, Peruvian citizens, filed suit, in diversity of citizenship, against the corporate owner of a Miami hotel and against its Pennsylvania insurer. Recovery was sought for “negligent infliction of mental distress” [appellant’s terminology] and for the value of property robbed of appellants while they were guests in the hotel on January 21, 1971.

After discovery and depositions the District Court granted a defense motion for summary judgment. .We affirm in part and, in part, vacate and remand.

Dalila Pardo de Saric and her daughter, Luz-Maria Saric, registered at the McAllister. They were assigned Room 1049, were escorted to that room immediately after checking in, remained in the room for some forty-five minutes to an hour, and upon opening the door to leave for the first time since registering were met by two masked robbers, one of whom was armed with a handgun.

By the menace of the gun the robbers forced their way into the room. There is no evidence that either of the victims were ever struck or jostled with the weapon. One of the intruders forced Luz-Maria Saric into the bathroom, where she fainted and fell to the floor. Upon regaining consciousness, she was examined by one of the robbers for hidden jewelry. Dalila Pardo de Saric was required to lie on the floor, with gun to her head, while jewelry, money, and travelers checks were taken from her purse.

During discovery the following interrogatory was propounded to Dalila Pardo de Saric:

“6. Describe the injuries you received in the incident described in said complaint, stating exactly what parts of the body were involved and the nature of said injury (whether it was a bruise, fracture of a bone, sprain, or otherwise).”
Dalila de Saric answered under oath:
“6. I injured my finger producing small cuts, taking my ring out from it.”

Luz-Maria testified in her deposition that neither robber struck, hit, or abused her, that she received no physical injury as a result of the robbery, but she alleges that she suffered a traumatic neurosis accompanied by physical manifestations such as dyspepsia, trembling, hyperventilation, flatulence, and difficulty in swallowing.

Appellants have framed the appellate issues in the following language:

1. Whether mere impact, without signs or marks of physical injury, is sufficient to maintain an action for the negligent infliction of mental distress under the law of Florida.

2. Whether Florida statute § 509.111 applies to the facts of this case.

3. Whether the statute violates the Florida Constitution.

4. Whether the statute violates the equal protection clause of the Fourteenth Amendment.

The above mentioned Florida statute limits a hotel’s liability for the loss of money or valuables by its guests to those items deposited with the hotel management in exchange for a written receipt stating the value of the property deposited. The hotel is mandatorily required to accept for safekeeping valuables aggregating no more than $1,000 in value. Liability for loss is limited to $1,000 unless the hotel voluntarily accepts a greater amount, Florida statutes, § 509.-111 (1972). . .

Florida law further requires a hotel to post notice of this limitation of its liability, Florida statutes, § 509.101.

We shall discuss the issues in the order presented.

I

After the District Court decided this case, the Supreme Court of Florida decided Gilliam v. Stewart, 291 So.2d 593 (1974).

That decision, it seems to us, clearly reaffirmed the “physical impact” rule theretofore prevailing in Florida, pursuant to which the summary judgment denying recovery for “mental distress” was correct.

II

At common law, innkeepers were insurers of the property of their guests, and their liability was like that of a bailee. Since the innkeeper was being compensated for his services, he was a bailee for hire and thus subject to the standard of ordinary care, Adelphia Hotel Company v. Providence Stock Company, 3 Cir., 1922, 277 F. 905; Walpert v. Bohan, 126 Ga. 532, 55 S.E. 181 (1906). Many jurisdictions, including Florida, have limited an innkeeper’s liability by statute. Enacted, as they were, in derrogation of the common law, these statutes have been strictly construed. Thompson v. Thompson, 218 U.S. 611, 31 S.Ct. 111, 54 L.Ed. 1180 (1910); Johnston v. Mobile Hotel Company, 27 Ala.App. 145, 167 So. 595 (1936), cert. denied, 232 Ala. 175, 167 So. 596; 73 Am.Jur.2d, Statutes, § 287; 40 Am.Jur.2d, Hotels, Motels, etc., § 153 (1968).

In its decision, the District Court apparently relied on Ely v. Charellen Corporation, 5 Cir., 1941, 120 F.2d 984. As it develops, this case is the last word in this Court or from the Florida Courts dealing with the issue which, thirty-four years later, now makes its second appearance.

In Ely, the plaintiff registered at a Florida hotel. Jewelry was stolen from her room. At that time, as today, Florida law provided that a hotel was not liable for the loss of valuables unless deposited with the hotel management [Chapter 16042 Florida Acts, § 40 (1933), the forerunner of the present § 509.111]. Also in effect at that time, as today, was a requirement that the hotel post notice of this and other rules, Chapter 16042 Florida Act, § 38 (1933). In Ely, as in the case sub judice, neither party complied with the statutes, in that the plaintiff left valuables in her room and the hotel had failed to post notice of its liability limitations.

The plaintiff argued that the hotel’s obligation to post notice of the Act had to be met before the hotel could claim its benefits. This Court, in a one page opinion, held that because § 40 listed no exceptions, no liability would attach to the hotel proprietor for the loss of jewelry unless it was deposited with the hotel. We noted that § 40 provided that in no event would a hotel be liable for loss of goods not deposited with the hotel (emphasis ours). This same “in no event” language appears in the present statute. The statutes have been amended by the Florida legislature three times since Ely, always retaining the “in no event” phraseology which Ely held to be decisive regardless of whether the statutory notice had, or had not been, posted.

The outstanding, unreversed decision in Ely is binding on us.

In their brief, appellants state their position on this point as follows:

“As the plaintiffs had not yet deposited their valuables with the management at the time of the robbery, we have stipulated that if the statute applies to the facts of this case, and is constitutional, then the plaintiffs are barred from recovering for their loss of personal property. If, on the other hand, the statute does not apply, or is unconstitutional, then the defendants are strictly liable for plaintiffs’ loss of personal property.”

We are of the opinion that the statute does apply because it refers to any loss, which could apply to losses by robbery as well as from any other source. Accordingly, we cannot accept the argument that the statute applies only to items which guests have carelessly left in their rooms, subject to the possibility of theft.

This leaves only the constitutional argument.

Neither the pleadings nor the remainder of the appellate record explicitly indicate whether the Section 509.101 notice, in the form required in 1971, was posted, or not posted, by the hotel. The summary judgment, as would ordinarily be true in such instances, made no finding on this point. Summary judgments depend on the absence of any genuine issue of material fact.

The appellants say that a failure to post the notices would render Section 509.111 violative of both the federal and Florida Constitutions and further argue that posting the notice was an affirmative defense, hence a failure to post must be assumed on summary judgment because the posting was not pleaded or shown.

It is a fact, however, that the answer filed on behalf of the hotel stated “that the hotel has no responsibility at all for the personal property of the plaintiffs in accordance with Florida statute, § 509.-111 which provides for the only conditions under which this defendant can be liable for personal property”.

The plaintiffs did not counter this defense by motion to strike it for failure to post notices nor did it offer any proof by deposition or otherwise that the Section 509.101 notices had not been posted.

In a picture of the lobby, facing the elevators, (Appendix, p. 148) we note the following:

“HOTEL RULES
Between 11 p. m. and 7 a. m. registered guests only will be allowed to go up to the rooms.”

This is followed by a statement of the Rule in Spanish.

So, at least some notices were posted.

In this state of the record we do not believe that the ends of justice would be served by our indulging in a factual assumption as to whether the statutory notice was, or was not posted. Moreover, the constitutional issues now raised were not submitted to (and thus not decided by) the District Court.

We vacate the judgment of the District Court insofar as it involved the alleged property loss. In that respect, we remand the case for its consideration of and judgment on the following points:

1. Were the statutory notices posted?

2. If not posted, does the interpretation rendered in Ely v. Charellen Corporation, supra, render the statute invalid under either the state or federal constitutions?

3. For such further proceedings as the resolution of these questions may make appropriate.

The judgment of the District Court denying recovery for personal injuries allegedly caused by mental distress is affirmed.

The judgment as to property losses is vacated and the cause is, in that respect, remanded for further proceedings not inconsistent herewith.

      . Florida Statute, § 509.111 (1972):

        509.111 Liability for property of guests and tenants

      (1) The proprietor or manager of a hotel, apartment house, rooming house, motor court, trailer court or boarding house in this state shall, in no event, be liable or responsible for any loss of any moneys, securities, jewelry or precious stones of any kind whatever belonging to any lodger, boarder, guest, tenant or occupant of or in said hotel, apartment, rooming house, boarding house, motor court or trailer court, unless the owner thereof shall make a special deposit of said property and take a receipt in writing therefor from the proprietor or manager or a clerk in the office of said establishment, which receipt shall set forth the value of said property, provided, however, that no proprietor or manager or clerk .in the office of a hotel, apartment house, rooming house, motor court, trailer court or boarding house in this state shall be obliged to receive from any one lodger, boarder, guest, tenant or occupant of or in said hotel, apartment house, rooming house, motor court, trailer court or boarding house, a deposit of any money, securities, jewelry or precious stones of any kind whatever, exceeding a combined total value of one thousand dollars or shall he be liable in damages in a sum in excess thereof unless such proprietor, manager, or clerk accept voluntarily such chattels for safekeeping, having a combined total value in excess of one thousand dollars, then'and in such event he shall be liable in damages in a sum equal to the damage sustained by such lodger, boarder, guest, tenant or occupant.
      (2) The proprietor or manager of a hotel, apartment house, rooming house, motor court, trailer court or boarding house in this state, shall, in no event, be liable or responsible to any lodger, boarder, guest, tenant or occupant for the loss of wearing apparel, goods or other property, except' as provided in subsection (1) hereof, unless it shall be made to appear by proof that such loss occurred as the proximate result; of fault or negligence of such proprietor or manager or an employee thereof, and in case of fault or negligence he shall not be liable for a greater sum than one hundred dollars unless the lodger, boarder, guest, tenant or occupant, shall, prior to the loss or damage, file with the proprietor, manager or clerk of said establishment an inventory of his effects and the true value thereof, and such proprietor, manager or clerk is given the opportunity to inspect such effects and check them with such inventory; provided however, that the proprietor, manager or clerk of a hotel, apartment house, rooming house, motor court, trailer court, or boarding house in this state, shall, in no event, be liable or responsible to any guest, lodger, boarder, tenant or occupant for the loss of wearing apparel, goods or other property or chattels, scheduled in such inventory in a total amount exceeding five hundred dollars.
      [This is the wording of the statute in effect at the time of the loss here in question. The statute was again amended in 1973].

      . Florida Statute.

        509.101 Proprietors or managers may make rules; maintenance of register

      (1) Every proprietor or manager of a public lodging or public food service establishment may prescribe and establish reasonable rules and regulations for the government and management of any such lodging or food service establishment, and its occupants and employees; and every lodger, boarder, guest, tenant, or person staying, sojourning, eating or employed in said lodging or food service establishment shall conform to and abide by said rules and regulations so long as he shall remain in or at said lodging or food service establishment. These rules and regulations shall be held or deemed to be a special contract and agreement between such proprietor or manager and each and every lodger, boarder, guest, tenant, employee or person staying or sojourning, ordering, eating, being served or using the facilities of or at any public lodging or food service establishment, and shall regulate, fix and control the liabilities, responsibilities and obligations of each, both and all parties. Any rules or regulations promulgated pursuant to this section shall be printed in the English language and posted together with a copy of §§ 509.111, 509.151, and 509.161 in each bedroom of lodging establishments and also in the office, hall or lobby of such lodging and food service establishments.
      (2) It shall be the duty of all public lodging establishment operators to maintain at all times a register signed by or for guests who occupy rooms within the establishment, showing the dates upon which the rooms were occupied by such guests and the rates charged for their occupancy. This register shall be available for inspection by the division of hotels and restaurants at any time. Operators shall not be required to keep available registers which are more than two years old.
      [As in effect at the time of the loss here in question].