YODER BROTHERS, INC., Plaintiff-Appellant-Cross Appellee, v.

CALIFORNIA-FLORIDA PLANT CORPORATION et al., Defendants-Appellees-Cross Appellants.

CALIFORNIA-FLORIDA PLANT CORPORATION et al., Plaintiffs-Appellees-Cross Appellants, v.

YODER BROTHERS, INC., DefendantAppellant-Cross Appellee.

No. 75-2141.

United States Court of Appeals, Fifth Circuit.

Sept. 7, 1976.

Charles M. Ullman, David L. Foster, Frederick L. McKnight, New York City, for plaintiff-appellant-cross appellee.

Frederick P. Furth, Arthur L. Martin, San Francisco, Cal., John H. Boone, San Francisco, Cal., Thomas E. Schatzel, Santa Clara, Cal., for defendants-appellees-cross appellants.

Appeals from the United States District Court for the Southern District of Florida. Before BROWN, Chief Judge, and JONES and GOLDBERG, Circuit Judges.

GOLDBERG, Circuit Judge: In this clash between two giants of the chrysanthemum business, we confront a myriad of antitrust and plant patent issues. Yoder Brothers (Yoder), plaintiff in the district court, sued, alleging infringement of twenty-one chrysanthemum plant patents by California-Florida Plant Corp. (CFPC) and California-Florida Plant Corp. of Florida (CFPCF) (sometimes referred to collectively as Cal-Florida). CFPC and CFPCF denied the infringement and filed antitrust counterclaims under sections 1 and 2 of the Sherman Act. As to seven of the chrysanthemum plant patents, the lower court directed verdicts for Yoder that the patents were valid and infringed and awarded treble damages. The court also ruled for Yoder on Cal-Florida's section 2 claim. CFPC and CFPCF, however, prevailed in their antitrust counterclaim under section 1 and received treble damages for Yoder's derelictions.

Because many of the issues in this case turn on the particular nature of the ornamental plant industry and the specific characteristics of chrysanthemums, we shall describe the background facts in some detail before discussing the many complex legal issues presented on this appeal. Following our description of the facts, we shall briefly sketch the procedural history of the case. Finally, we shall consider the antitrust claims and the issues relating to the plant patent law.

I. General Background

A. The Chrysanthemum Industry Chrysanthemums, in their natural state, blossom only during the fall. This is because they are photoperiodic in nature, meaning that their growth is affected by the relative lengths of lightness and darkness in the day. When the days are long, the chrysanthemum plant remains in a vegetative state. As the nights become longer, the initiation process of the chrysanthemum

bud begins. Thus, in early August, when the nights achieve a duration of nine and one-half continuous dark hours, the chrysanthemum plant in its natural state will begin the process of developing a flower. During the fall and early winter months, the mature flower appears.

Yoder began doing business in the 1930's as a simple greenhouse operator, specializing in tomatoes. Soon thereafter, because the fall tomato crop was less profitable than the spring crop, it decided to replace the fall crop with chrysanthemums. In 1939 or 1940, Yoder employees began research into out-of-season flowering of chrysanthemums. By applying black cloth shades over the chrysanthemums when dark hours were needed and applying artificial light when light hours were needed, it became possible to flower chrysanthemums on a year-round basis. Yet this breakthrough was not without its problems. For example, the use of black cloth shades resulted in an abnormally high temperature build-up around the plants, which in turn retarded bud initiation. Similarly, when the finishing temperatures were too warm, the chrysanthemums would not hold their color. In an effort to adjust for these conditions and to improve the quality of the chrysanthemum generally, Yoder initiated a breeding program in the early 1940's. One of the most important goals of the breeding program was the development of new varieties for consumers.

Although the ornamental plant industry encompasses many different kinds of flowers, including azaleas, carnations, roses, african violets, geraniums, snapdragons, and others, chrysanthemums are one of the most popular of the genre. According to the United States Department of Agriculture, in 1971 approximately 2,134 growers in twenty-three states sold nearly 145 million blooms from about 129 million standard variety chrysanthemum plants, 34.5 million blooms from 136 million pompon chrysanthemum plants, and 17.5 million potted chrysanthemum plants. At the time of the trial there were over 475 different varieties of chrysanthemums available. The total wholesale value of growers' sales in the twenty-three states that year was approximately 83.5 million dollars.

Chrysanthemums have been subject to intensive breeding efforts over the past thirty years; each individual specimen is a genetically unique complex organism. Several definitions of the term "variety" of chrysanthemum were offered at trial. Mr. Duffett, Yoder's head breeder, defined a variety as a group of individual plants which, on the basis of observation by skilled floriculturists and according to reasonable commercial tolerances, display identical characteristics under similar environments. Cal-Florida defined variety in its complaint as "a subspecies or class of chrysanthemums distinguishable from other subspecies or classes of chrysanthemums by distinct characteristics, such as color, hue, shape and size of petal or blossom or any of them." New varieties of chrysanthemums are developed in two major ways: by sexual reproduction and by mutagenic techniques. Sexual reproduction, the result of self or cross pollination, produces a genetically unique seedling, the characteristics of which are impossible to predict. Mutagenic techniques simply accelerate the natural rate of mutation in the chrysanthemum plant itself. A mutation was defined by Mr. Duffett as "a change in the number of chromosomes or a change in the chromosome position or a specific change in the genes within those chromosomes." Technically, only those mutations that first express themselves as bud variations are properly called "sports"; however, the word is used loosely in the industry as a general synonym for mutation, and we will so use it. Two types of sports can appear: spontaneous sports and radiation sports. The cells of all living things occasionally mutate, and spontaneous sports are simply the result of that process. Radiation sports, on the other hand, are induced artificially, through exposure to such things as gamma radiation from radioactive cobalt and X-rays. These techniques do nothing that could not occur in nature apart from speeding up the natural mutation process. Although most of the

mutations induced by radiation are not commercially usable plants, a skilled breeder will select for further development those that display such desirable characteristics as fast response time, temperature tolerance, durability, size, and vigor.

After a breeder has successfully isolated a new variety, the only way he can preserve his creation is by means of asexual reproduction. In the case of chrysanthemums, the most common technique of asexual reproduction is the taking of cuttings from a stock plant. Cuttings, as defined in the Cal-Florida complaint, are "sections or parts of chrysanthemum plants which may be grown into mature plants for sale as cut flowers and/or potted plants or from which additional cuttings may be harvested." According to Yoder's suggested definition, cuttings are simply immature chrysanthemum plants. Since a cutting is genetically identical to the parent plant, it will develop into a plant whose characteristics match the parent's exactly, so long as the same environmental conditions obtain. A central fact of life in the chrysanthemum industry is the ease with which cuttings can be taken from parent plants: from one chrysanthemum, it is theoretically possible to develop an infinitely large stock, by taking cuttings, maturing some into flowered plants, taking more cuttings, and so on.

Over the years since Yoder first entered the chrysanthemum business, the industry has become internally specialized. At the first functional level are the breeders, who create new varieties of chrysanthemums. Breeding is an expensive, complex procedure. The breeder must possess the skill and discrimination to spot potential new varieties and recognize whether they possess desirable traits; facilities for elaborate testing and development must be available. Because chrysanthemums mutate rapidly, a breeder must always be on the lookout for new changes.

At the next level in the industry are the propagator-distributors. The propagatordistributors build up mother stock from sources such as breeders, retail florists, or their existing flowers, and reproduce cuttings from that mother stock. In a sense they are simply mass producers of cuttings. They do not develop cuttings to the mature flower stage (except for purposes of their own testing). Next are the growers, who develop cuttings purchased from propagator-distributors into mature plants either for cut flowers or potted plants. Combining the function of propagator-distributors and growers are the self-propagators. CalFlorida defined a "self-propagator" as "a person who either buys or establishes stock and takes cuttings for the sole purpose of producing cut flowers and/or potted plants for resale or own use." In other words, the self-propagators are vertically integrated into one step. Finally, the growers (or selfpropagators) sell their products to retail florists, who in turn sell to ultimate consumers.

B. The Parties During the times relevant to this litigation, Yoder operated on two levels in the business: as a substantial (if not the largest) breeder of new varieties of chrysanthemums, and as a large propagator-distributor. In addition to chrysanthemums, Yoder dealt with carnation cuttings, azalea liners (baby azaleas), and snapdragon seeds. Yoder is an Ohio corporation, and it sells its products nationwide.

CFPC, which is incorporated in California, and which sells primarily in the western part of the United States, was a propagator-distributor. CFPCF, a wholly owned subsidiary of CFPC, was also a propagatordistributor. CFPCF is incorporated in Florida and it sells in the eastern United States. Both CFPC and CFPCF specialize in chrysanthemums. They entered the market in 1957, at a time when Yoder was clearly the largest of the propagator-distributors. During the period in question, Yoder and the two Cal-Florida companies competed horizontally as propagator-distributors' they did not compete as breeders, although Cal-Florida did make a minor foray into breeding during the 1960's.

C. The Plant Protection Programs

The issues in this litigation arose out of Yoder's breeding operations and its desire to secure a fair return from those efforts. Theoretically, once the first plant of a new variety is sold, it is impossible for a breeder ever again to be compensated for his efforts in developing it. As indicated above, anyone can take a cutting from that new plant, propagate a number of cuttings from the first cutting, and obtain an infinite supply of the plant. Even as a practical matter, the evidence at the trial suggested that it was relatively easy to obtain plant material of new varieties without the consent of the breeder.

Yoder's first effort to obtain compensation for its breeders took the form of a program entitled the Yoder Grower Agreement, or YGA, instituted around 1958. In return for access to new varieties developed by Yoder, growers were required to sign an agreement that prohibited purchasers of Yoder cuttings from selling, loaning, or otherwise disposing of purchased cuttings. Specifically, growers were prohibited from selling Yoder cuttings to self-propagators or to propagator-distributors. The agreement also contained a "sport return clause," which required purchasers of Yoder cuttings to return to Yoder any mutations which appeared either directly or indirectly on Yoder cuttings. Yoder enforced the YGA program by refusing to ship covered varieties to persons who did not sign a YGA agreement. The most significant aspect of the YGA program was the fact that a royalty was charged on all Yoder cuttings propagated or used.

In the early 1960's, the YGA program was replaced by a new system that took its name from the Breeder-Grower Agreement that was its central reason for being. A corporation called BGA, International [BGA] was created to administer the program. Any breeder could be a member of BGA. According to the members' regulations, voting strength was proportional to the amount of expenses the member bore. Expenses, in turn, were assessed in proportion to the amount of royalties collected on the breeder's new varieties. The practical effect of these provisions was to secure control of BGA in Yoder's hands. The bylaws and articles of incorporation of BGA indicated that its primary purpose was to insure a measure of remuneration to the breeders. A breeder would list his new variety of ornamental plant with BGA, and BGA would make plant material of that variety freely available to propagator-distributors. The breeder members of BGA agreed on the amount of royalty to be charged. Significantly, during most of the time that the BGA program was in existence, it was administered within Yoder's offices.

Three kinds of agreements were used in administering the BGA program. The first was the Propagator-Distributor Agreement, which permitted the signatory to make any desired commercial use of purchased cuttings or cuttings harvested from the stock plants. Participating propagator-distributors had an obligation to send a grower or grower license agreement to customers who wanted to purchase a BGA variety. For each cutting sold, the propagator-distributor had a contractual obligation to pay BGA a $.006 royalty. He also was required to report the number of cuttings sold quarterly, not to give cuttings to non-signatories, to exercise reasonable care to keep others from getting cuttings, and to allow the breeder to inspect and inventory his plantings at all reasonable times. The propagator-distributor agreement also contained a provision whereby the propagator-distributor was entitled to full credit from BGA if he was unable to collect the $.006 royalty from his customers. The agreement required the propagator-distributor to return all mutations and sports to the breeder, who retained all rights to them.

Grower License Agreements were signed by self-propagators. These agreements conferred the right to grow and to propagate plants to sell as cut flowers or potted plants. The restrictions and conditions in the agreement were essentially the same as

those in the Propagator-Distributor Agreement, except that the royalty payment was to go to the propagator-distributor who had furnished the cutting, instead of to BGA.

Finally, the growers signed a Grower Agreement. The Grower Agreement covered growers who purchased cuttings from propagator-distributors for the purpose of selling flowers or potted plants. All propagation rights were again reserved to BGA, and the grower agreed not to propagate without BGA's consent, not to give BGA varieties to others for the purpose of propagation, to allow reasonable inspections, and to return sports.

Typically, the BGA program operated as follows: A propagator-distributor would propagate a large number of cuttings of a BGA new variety. For each cutting he sold to a grower or a self-propagator, he would pay BGA $.006. On his invoices to his customers, a base price for the cutting would appear, and separately stated would be the amount of BGA royalty due. Evidence at the trial indicated that the industry was generally aware of the existence of the BGA royalties and understood that these royalties were in essence compensation to the breeders of the new variety. The customer would therefore pay the base price plus royalty to the propagator-distributor, and the latter would in turn remit the full royalty amount to BGA. Thus, the role of the propagator-distributor was that of a BGA administrator; his cooperation was essential in the process of collecting royalties from those who sold or used the protected varieties and channeling the monies to the appropriate breeder.^{Footnote 1}

The degree of enforcement of the BGA program was the subject of some dispute at the trial. If Yoder knew that a grower or a self-propagator had not signed a BGA agreement, it would not ship the requested BGA variety. Instead, a substitute variety would be sent. On the other hand, the testimony indicated that a substantial number of complaints were voiced about the lack of enforcement of the BGA program against non-signatories. No lawsuits were ever filed. If a grower or self-propagator went out and purchased his mother stock from a retail florist, for example, there was nothing that Yoder could or would do about the fact that he had obtained a protected variety without signing a contract. Yoder explained its lack of enforcement by the need to maintain good will in the industry. If a grower member informed BGA that someone had access to BGA varieties who had not signed the contract, a BGA representative would check with the alleged pirate and try to persuade him to become a member. Yoder's representative testified that in almost every case, once the purpose of the BGA system was explained to a non-participant, the grower or self-propagator would usually agree to sign a contract and to pay the royalty to BGA. From Cal-Florida's perspective, Yoder's tactics were tantamount to strong-arming. Both parties agreed that new varieties were helpful to everyone in the industry. It was Yoder's position that BGA, by providing a means for breeder compensation, was helping in the development of new varieties of chrysanthemums.

The GRA program [Grower Rights Agreement], developed by Yoder in 1968 to supplement BGA, was similar to the latter program in many ways. When a grower or propagator-distributor or self-propagator discovered a mutation on plant material that was not covered by a BGA agreement (in other words, any free plant), he could send the mutation to Yoder Brothers for evaluation of its commercial possibilities. After extensive testing, if Yoder decided that the new variety could profitably be introduced, the grower who discovered the variety would be entitled to 50% of the royalty return. The agreements used to administer GRA followed the BGA pattern'a Propagator-Distributor Agreement, a Grower License Agreement, and a Grower Agreement. Unlike BGA, under GRA the royalties collected were returned directly to

Yoder. The amount of the royalty under GRA was again $.006 per cutting.^{Footnote 2}

Cal-Florida participated in the BGA and GRA programs only as a propagator-distributor. Although it did conduct a breeding program of its own during the 1960's, it never registered any new varieties with BGA. Instead, it developed the CFPC program. The CFPC program used the same three kinds of agreements as the BGA program'the propagator-distributor contract, the grower-propagator license, and the grower agreement. In one aspect, however, the CFPC program was more restrictive than the BGA program: sales to self-propagators and other propagator-distributors were prohibited. The royalty rate was the same $.006 per cutting. Like the BGA program from which it was copied, the CFPC program's basic purpose was to obtain remuneration for the company's breeding efforts. Sports discovered by participants in the CFPC program were required to be returned to Cal-Florida, the breeder.

As a propagator-distributor participant in the BGA program, Cal-Florida of course paid royalties to BGA. During the relevant period, CFPC and CFPCF combined paid $229,805.12 in BGA royalties and $27,941.18 in GRA royalties'a total of $257,746.30. The evidence showed that over the years, more and more of Cal-Florida's sales were of varieties controlled by Yoder under either BGA or GRA. In 1963, 0.19% of their cutting sales were BGA or GRA varieties; by 1969, the number had grown to 17.59% of total sales, and by 1971, to 41.22%.

BGA and GRA royalties were always separately stated on Cal-Florida's invoices to its customers. In addition, the following explanation was to be found in its catalogs: BGA (BREEDER GROWER AGREEMENT) VARIETIES. The CaliforniaFlorida Plant Corp. is licensed by BGA International to propagate and distribute BGA varieties. The terms of our Propagator-Distributor Contract call for the customer to sign a BGA Agreement prior to the shipment of any BGA variety.

BGA varieties are subject to all discounts of Volume, Advance Order and Prompt Payment. The current BGA Royalty is $0.60 per 100 cuttings, rooted or unrooted, and is in addition to the listed base price. BGA Royalties are not subject to Discount or Adjustment of any kind and the total amount of BGA Royalty collected by us is returned to BGA International.

GRA (GROWER RIGHTS AGREEMENT) VARIETIES. The CaliforniaFlorida Plant Corp. is licensed to grow, propagate and distribute GRA varieties. The terms of our Propagator-Distributor contract call for the customer to sign a GRA Agreement prior to us shipping any GRA varieties. GRA varieties are subject to all discounts of Volume, Advance Order and Prompt Payment. The current GRA Royalty is $0.60 per 100 cuttings, rooted or unrooted, and is in addition to the base price. GRA Royalties are not subject to Discount or Adjustment of any kind and the total amount of GRA Royalty collected by us is returned to the developer. ROYALTY CHARGES. All Royalty Charges (CFPC, BGA, and GRA) will be billed separately and included in the monthly statement.

Thus, CFPC clearly segregated the BGA and GRA royalty charges from the prices charged for the cuttings it sold.

D. Government Intervention On April 20, 1970, the United States brought an action against Yoder, alleging

that the BGA and GRA programs violated sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2. The Government's suit ended in a consent judgment entered on March 15, 1972 in the Northern District of Ohio. The consent decree abolished BGA and GRA and prohibited further collection of royalties and further enforcement of the sport return clauses; it also required Yoder to take certain affirmative actions to inform the former participants of the changed status quo. The judgment expressly stated that it did not apply to any rights that Yoder had obtained under the patent laws of the United States or of any foreign country. Cal-Florida had moved to intervene in the Government's case on February 16, 1972. On March 15, 1972, the same day as the consent decree was finally approved, the court denied its motion.

E. Post BGA: Plant Patents

After BGA ended, around the end of 1971, Yoder started patenting some of its new varieties under the Plant Patent Act, 35 U.S.C. § 161 et seq. Several salient differences existed between the rights conferred by a plant patent and the rights secured under the old BGA and GRA agreements. For example, under a plant patent, sports of the patented plant are not covered by the original patent. See Part IV, infra. Second, the royalty event for a patented plant is the asexual reproduction of the plant, instead of its use or sale. Even so, the Plant Patent Act and the BGA/GRA programs were quite similar. Under both, licenses for propagation by others could be issued, and royalties could be charged for the use of the plant. These similarities have led Cal-Florida to allege that Yoder's new use of the plant patent laws is simply a continuation of its old and illegal BGA program. Since BGA and GRA ended, Yoder has secured plant patents on all new varieties it has introduced to the trade. Shortly after the Government suit was terminated, and after extensive unsuccessful negotiations with Cal-Florida, Yoder filed its complaint commencing this litigation. We thus arrive at last at the beginning'the procedural history of the case before us.

II. Summary of Proceedings Below On March 6, 1973, Yoder filed its complaint in the United States District Court for the Southern District of Florida, alleging infringement of twenty-one chrysanthemum plant patents by CFPC and CFPCF. CFPCF answered on April 12,1973, denying the infringement and setting forth antitrust and trade disparagement counterclaims. On the same day, CFPC moved to dismiss for improper venue under Rule 12(b)(3), Federal Rules of Civil Procedure. In addition, CFPC filed suit in the Northern District of California on June 5, 1973, for a declaratory judgment on the validity of Yoder's patents and for trade disparagement damages. On December 26, 1973, the California action was ordered transferred to the Southern District of Florida pursuant to 28 U.S.C. § 1404(a) (transfer in the interests of justice to district where suit might have been brought). In the first pretrial order, filed January 16, 1974, the district court denied CFPC's motion to dismiss on venue grounds. The two cases were consolidated by an order entered March 4, 1974.

The trial before a jury began on April 23, 1974. The issues presented for trial were stipulated by the parties in their joint Pretrial Stipulation and involved both patent and antitrust claims.^{Footnote 3} Yoder claimed infringement and contributory infringement of twenty different United States plant patents by either CFPC or CFPCF or both. The two Cal-Florida companies asserted the invalidity of twenty-two United States plant patents. In its counterclaim, CalFlorida asserted that Yoder, by its participation in the BGA and GRA programs, combined to restrain trade in violation of Sherman Act § 1,15 U.S.C. § 1, and further alleged that Yoder had committed acts of monopolization of the trade in chrysanthe-

mum cuttings, in violation of Sherman Act § 2, 15 U.S.C. § 2.

At the close of the evidence, the district court directed verdicts on several critical issues. On June 12,1974, it ruled for Yoder on the issues of patent validity and infringement of all twenty patents, subject to Cal-Florida's claims of contract rights and prior commercial exploitation; additionally, it ruled in Yoder's favor on all issues of inventorship, newness and distinctness, asexual reproduction, and adequacy of description. On June 13, 1974, the court granted a verdict in favor of Yoder on Cal-Florida's monopoly counterclaims. On Cal-Florida's side, the court directed a verdict that Yoder, through the BGA and GRA programs, had participated in a group boycott which constituted a per se violation of Sherman Act § 1. The court denied Yoder's motions for directed verdicts claiming that there was insufficient evidence to sustain a verdict: (1) that BGA and GRA were illegal; (2) that CFPC and CFPCF were injured as a result of the BGA and GRA programs (i. e. lack of "fact of damage"); (3) that CFPC and CFPCF were in the "target area" of the BGA and GRA programs (/. e. that they had standing to sue under the antitrust laws); and (4) that any damages were supportable, since the damage proof and theories were legally improper, factually unsupported, and speculative.

The patent claims were submitted to the jury on special interrogatories. The antitrust claims, in contrast, were submitted under a general verdict form. Two theories of antitrust damages were submitted to the jury: the royalty payments theory, and the price differential theory. In connection with the royalty payments theory, the jury was told that unless the BGA and GRA systems were analogous to a "pre-existing cost plus contract," they would not be permitted to consider whether Cal-Florida had "passed on" the incidence of the royalties paid under those programs to its customers. This theory was submitted over Yoder's strenuous objection. The price differential theory, based on evidence showing the comparative prices charged by CFPC and CF