This is a suit for a declaratory judgment (Judicial Code § 274d, 28 U.S.C. § 400, 28 U.S.C.A. § 400) and an injunction, instituted by respondent for the determination of the legality and enforceability of a provision of a patent license agreement. The District Court, whose jurisdiction was based on diversity of citizenship (Judicial Code § 24(1), 28 U.S.C. § 41(1), 28 U.S.C.A. § 41(1) entered judgment for petitioner, holding the provision valid. The Circuit Court of Appeals reversed by a divided vote, 2 Cir., 156 F.2d 198, being of the opinion that the provision in question was illegal under the line of decisions represented by Mercoid Corporation v. Mid-Continent Co., 320 U.S. 661, 64 S.Ct. 268, 88 L.Ed. 376. The case is here on a petition for a writ of certiorari which we granted because of the public importance of the question presented and of the apparent conflict between the decision below and Allbright-Nell Co. v. Stanley Hiller Co., 72 F.2d 392, decided by the Seventh Circuit Court of Appeals.
Petitioner, organized in 1934, has patents on a machine which bears the trade-mark 'Transwrap'. This machine makes transparent packages, simultaneously fills them with such articles as candy, and seals them. In 1937 petitioner sold and respondent acquired the Transwrap business in the United States, Canada, and Mexico, the right to use the trade-mark 'Transwrap', and an exclusive license to manufacture and sell the Transwrap machine under the patents petitioner then owned or might acqui e. The agreement contained a formula by which royalties were to be computed and paid. The term of the agreement was ten years with an option in respondent to renew it thereafter for five year periods during the life of the patents covered by the agreement. The agreement could be terminated by petitioner on notice for specified defaults on respondent's part. The provision of the agreement around which the present controversy turns is a covenant by respondent to assign to petitioner improvement patents applicable to the machine and suitable for use in connection with it.
The parties had operated under the agreement for several years when petitioner ascertained that respondent had taken out certain patents on improvements in the machine. Petitioner notified respondent that its failure to disclose and assign these improvements constituted a breach of the agreement and called on respondent to remedy the default. When that did not occur petitioner notified respondent that the agreement would be terminated on a day certain. Thereupon respondent instituted this action asking that the provisions respecting the improvement patents be declared illegal and unenforceable and that petitioner be enjoined from terminating the agreement.