In Hydril Co. v. Grant Prideco LP, Fed. Cir., No. 2006-1188, 1/25/07, the Federal Circuit held that a plaintiff may state a Sherman Act section 2 claim when it alleges that the holder of a fraudulently procured patent has directed threats of enforcement to the plaintiff’s customers, as opposed to the plaintiff. Hydril sued Grant Prideco on three causes of action: (1) a "Walker-Process" section 2 claim alleging that Grant Prideco monopolized two product markets by enforcing a patent it obtained by fraud on the Patent and Trademark Office; (2) a patent infringement claim regarding a patent Hydril owned; and (3) breach of contract. The court reversed the district court’s dismissal of the first two actions and vacated dismissal of the third.

1.Walker-Process Section 2 Claim

In Walker-Process Equipment, Inc. v. Food Machinery & Chemical Corp., 383 U.S. 172 (1965), the Supreme Court "concluded that the enforcement of a patent procured by fraud on the Patent Office may be violative of § 2 of the Sherman Act provided the other elements necessary to a § 2 case are present". 383 U.S. at 174

Hydril makes threaded connections for pipe used in oil and gas wells. Grant Prideco makes and sells drill pipe and pipe connections. Grant Prideco held a patent on a 5 and 7/8 inch diameter pipe connection. Hydril alleged that that the Patent Office would not have issued the patent had Grant Prideco disclosed prior art of which Grant Prideco was aware. Hydril also alleged that Grant Prideco obtained and maintained market power in the relevant markets by threatening to enforce its fraudulently procured patent against other connections makers, drill pipe distributors and end-users. Hydril contended that Grant Prideco’s threats were intended and understood to be a threat to refrain from sales of 5 and 7/8 inch drill pipe which, if heeded, would reduce sales of Hydril’s Wedge Thread, a tool used to help connect pipes and other conduits. Hydril did not allege that Grant Prideco threatened it with infringement litigation.

The court found the alleged conduct, if established, would constitute Walker-Process fraud. Citing Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059, 1070 (Fed. Cir. 1998), it held the fraud allegations were sufficient because "a fraudulent omission can be just as reprehensible an omission as a fraudulent misrepresentation." A party asserting a patent who is aware of the fraud when bringing an infringement suit exposes the patentee to liability under the antitrust laws. Id.

Reversing the district court’s decision, the court held that a Walker-Process claim may be based on enforcement activity directed at the plaintiff’s customers, as opposed to the plaintiff. "Threats of patent litigation against customers, based on a fraudulently-procured patent, with a reasonable likelihood that such threats could cause the customers to cease dealing with their supplier, is the kind of economic coercion that the antitrust laws are intended to prevent." The court noted its recent decision in Microchip Technology Inc. v. Chamberlain Group, 441 F.3d 936 (Fed. Cir. 2006), where it held that the jurisdictional test of reasonable apprehension of a patent suit under the Declaratory Judgment Act was not satisfied by threats of enforcement litigation directed at a patentee’s customers. Microchip did not require a different conclusion in this case, the court said, because although factually similar, Microchip decided a different question of law.

2. Patent Infringement Claim

Hydril alleged that Grant Prideco breached the parties’ "Wedge Agreement" and that Grant Prideco violated Hydril’s patent on its Wedge Thread. The Wedge Agreement settled an action Hydril brought against XL Systems Inc. ("XLS") for patent infringement and misappropriation of trade secrets. XLS was an entity Hydril owned and sold to Grant Prideco. Under the Wedge Agreement, Hydril granted Grant Prideco the exclusive right to use Hydril’s existing intellectual property and know-how on wedge technology to make large diameter pipe connections. In exchange, Grant Prideco granted Hydril the exclusive right to use XLS’ IP and know-how to make small diameter connections. Either party could develop products in the other’s field so long as it did so completely independently of the IP and know-how of its existing business. Hydril alleged that Grant Prideco breached the Wedge Agreement by disclosing Hydril’s IP and know-how and improperly using it for small diameter connections. Hydril alleged this conduct terminated the Wedge Agreement and that Grant Prideco was infringing Hydril’s patent rights because it no longer had a right to use Hydril’s patented technology.

The district court rejected Hydril’s infringement claim on the ground that a waiver provision in a merger agreement that the parties had signed when Grant Prideco acquired XLS precluded a patent infringement suit for claims "relating to the Agreement" and limited the parties’ remedies to breach of contract. The Federal Circuit disagreed with the district court, finding that it was doubtful that the waiver provision covered patent infringement claims. The merger agreement listed 11 types of conduct covered by the waiver, each of which arise out of contract performance, not the patent laws. The court found that without any express provision barring patent claims, it would be inconsistent, given the length and detail of the merger agreement, to exclude them. In addition, the court determined the waiver provision did not apply because Hydril’s infringement claim arose solely under the patent statute, not the merger agreement.

3. Breach of Contract Claim

With the federal antitrust and infringement dismissals reversed, the Federal Circuit found it likely that the district court would want to reinstate the state law claim and vacated dismissal of the contract claim.

Authored By:  Heather Cooper

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