United States v. Line Material Co., 333 U.S. 287 (1948), is a decision of the United States Supreme Court limiting the doctrine of the 1926 General Electric decision, excusing price fixing in patent license agreements. The Line Material Court held that cross-licenses between two manufacturer competitors, providing for fixing the prices of the licensed products and providing that one of the manufacturers would license other manufacturers under the patents of each manufacturer, subject to similar price fixing, violated Sherman Act § 1. The Court further held that the licensees who, with knowledge of such arrangements, entered into the price-fixing licenses thereby became party to a hub-and-spoke conspiracy in violation of Sherman Act § 1.
Background
All of the defendants in this case are manufacturers of electrical devices, the most important of which for purposes of this case are dropout fuse cutouts, which are devices for breaking electrical power circuits. The defendants engaged in a conspiracy to fix the prices of these devices. Defendant Southern States Equipment Corporation (Southern) acquired Lemmon U.S. Pat. No. 2,150,102, which the dropout fuse cutouts the defendants manufacture are said to infringe. Defendant Line Materials (Line) acquired Schultz U.S. Pat. No. 2,176,227, which is an improvement on the Lemmon patent (it is simpler and cheaper), but its use infringes the Lemmon patent. Line and Southern settled a patent dispute by entering into an agreement under which Southern licensed Line royalty-free under the Lemmon patent, and Line licensed Southern royalty-free under the Schultz patent and authorized Southern to grant sublicenses under the Schultz patent. The agreement also provided that all sublicenses granted by Southern under Line's patents were required to include provisions for minimum prices to be established by Line, and all sublicenses under the Lemmon patent were to include provisions for minimum prices to be fixed by Southern.
After various disputes over the licensing terms, Line, Southern, Kearney, General Electric, Westinghouse, Matthews, Schweitzer and Conrad, and Pacific had a meeting in 1940 at which they agreed upon a "standard" license. Several defendants, particularly General Electric, attempted to design around the patents and thus avoid infringement, but these efforts were unsuccessful. At a further meeting, the defendants concluded that it would be more feasible if Line would be the licensor rather than Southern. Under a new agreement, Line was granted a license under Southern's patents but only for cutouts in which the circuit interruption is caused by a fuse melting. Line also was authorized to grant licenses to third persons to make and sell electrical equipment embodying the inventions of Southern's patents. The new agreement provided that Southern received a license under the Line patents on condition that "the prices, terms and conditions of sale of the Southern Corporation for electric fuse equipment, made and sold under the licenses herein granted, shall . . . be not more favorable to the customer than those established from time to time and followed by the Line Company in making its sales."
Matthews, Railway and Kearney then deposited signed license agreements in escrow. The agreement was not to be effective until three out of five named cutout manufacturers in addition to Line, Southern and General Electric had entered into substantially identical license agreements. The condition of the escrow was satisfied and the license agreements became effective in July 1940. Porcelain and Pacific signed license agreements in November 1940, Schweitzer and Conrad in January 1941, Westinghouse also in January 1941, Johnson in June 1943, and Royal in March 1944. The defendants then adhered to a common price schedule.
It was conceded that each signer of the agreements was aware of the price provisions of the various agreements. Some of the licensees opposed or tried to limit the scope of the price-fixing provisions, but they all, even if reluctantly, acquiesced. The Supreme Court observed:
Undoubtedly, one purpose of the arrangements was to make possible the use by each manufacturer of the Lemmon and Schultz patents. These patents, in separate hands, produced a deadlock. Lemmon, by his basic patent, "blocked" Schultz' improvement. Cross-licenses furnished appellees a solution.
The Government sued the defendants for violation of Sherman Act § 1, but the district court dismissed the complaint as to all defendants, concluding that the doctrine of United States v. General Electric Co. (1926) was controlling.