We deal once again with the gas lift art whose importance in the field of oil operations is reflected by the volume of recent patent litigation.1 As before, we run into familiar names of common adversaries and here treat for at least the third time with the very King patent 487,2 whose validity3 was upheld in Bryan v. Garrett Oil Tools, Inc., 5 Cir., 1957, 245 F.2d 365, and U. S. Industries, Inc. v. Otis Engineering Corp., 5 Cir., 1958, 254 F.2d 198. While the case with this beginning still has many of the earmarks of the full blown patent validity-infringement trial into which it expanded, it is now really something quite different. Despite the obviously thorough pretrial preparation, an extended record comprehending countless exhibits prepared with care and much expense effectively to demonstrate what skilled experts discussed in terms close to the ultimate decision facing the Judge, this is not now a patent case. It is but another diversity case construing a Texas contract (license) made in Texas and generally performed (or breached) there.

Following the format of Luckett v. Del Park, Inc., 1926, 270 U.S. 496, 46 S. Ct. 397, 70 L. Ed. 703, U. S. Industries, Inc., owner of the King patent 487, brought this suit against Camco, the licensee, for patent infringement for acts outside the scope of the license4 granted. Camco denied any of its acts were outside the license (and hence it had not infringed the King patent) and alleged the affirmative defenses of laches and equitable estoppel. In addition, it asserted two counterclaims. In the First Counterclaim, based on diversity jurisdiction, 28 U.S.C.A. § 1332(a), Camco sought a declaratory judgment that under the applicable (Texas) law, its actions were within the license. In the Second, jurisdiction being based on the patent laws, Camco sought a declaratory judgment that the King patent was invalid and not infringed. After a lengthy trial, the Court held that Camco's action was within the license contract. This resulted in a judgment which (a) dismissed USI's complaint for infringement, (b) sustained Camco's First Counterclaim declaring its conduct within the scope of the license and (c) dismissed Camco's Second Counterclaim challenging validity of the King patent.5

While the problem is one of construction of a contract — a patent license, for which the usual principles of contract law control, Storm v. United States, 5 Cir., 1957, 243 F.2d 708, 710, 711; 69 C.J.S. Patents § 249 — the patent is of interest. For the patent and the 1947 controversy over it was the precipitating subject of the contract. Lest some small kernel be picked up and then by the tender, imaginative nurture of counsel be germinated into a full flower of truth as an authoritative construction and interpretation by us of King 487, we emphasize that our description of the patent, the novelty of its solutions, the meaning or limitation of its several claims has no such purpose. Our capsulated summary, with all of the attending inaccuracies, is merely to give some understanding to the text and context of this contract and the nature of the present controversy of whether particular devices are within the scope of the license grant.

The King 487 patent covers essentially two things in the gas lift field. First, it is a system by which there is installed in an oil well a series of control valves set to open at successively lower pressures from top to bottom and gas is introduced into the annulus between tubing and casing in predetermined volumes (amounts) and pressures.6 This permits automatic gas lift operations with increased efficiency. This result is without regard to whether the control valves are spring, pneumatic, hydraulic or weight loaded. Second, it relates to valves, as such.7 The distinctive novelty in this crowded old area was that the valves had a bellows charged and sealed with gas (or elastic pressure fluid). As to be expected, the two broad categories are further refined. Concerning the system, one group of claims (10, 11, 13) prescribe (a) the kind of valve, i. e., bellows charged and sealed, and (b) that the declining difference in pressure settings, top to bottom, be accomplished by differences in the sealed pressure-charge of the bellows.8 The other system claims involved here9 do not prescribe the type of valve or the manner by which pressure differences are to be achieved.10

As to the valves, the claims are subdivided into two groups. The first, and undoubtedly the most important for us even though they are admittedly excluded from the license and not charged to be infringed, comprises claims 3 and 12. These claims define a valve structure in which means are provided to furnish a seal protecting the bellows from pressure after the bellows has moved a certain predetermined distance.11 The second group of valves, claims 4, 8, 9, called for a dampener baffle as a means of preventing a too violent opening the moment the valve comes off its seat as the gas pressure introduced into the annulus overcomes the sealed pressure of the bellows valve.12

In like fashion to give understanding to the present controversy, it is helpful briefly to consider the assertions of USI. The contention of USI is twofold. First, the license to Camco did not cover valves, as such, at all. Second, the grant was limited to the King system and then only to the extent of the particular specified valves identified as "Exhibit B" in the contract. It then translates this into the specific charges that (1) as to valves, some Camco valves have dampeners constituting infringement on claims 4, 8 and 9; (2) as to the King system: (a) pressure differences, top to bottom, in the series valves are accomplished by differences in the sealed pressure charge in the bellows as specified in claims 10, 11 and 13; and as to some system applications, the valves sold are not similar to "Exhibit B" valves because (b) some Camco valves operate solely on the basis of a sealed pressure charged bellows and not in conjunction with a spring; and (c) some Camco valves are adapted for wire-line installation and retrieval in side pocket or other mandrels.13 On ample evidence not challenged here, the District Court found that Camco did all of these things, but that each was within the grant of the license and hence did not constitute vicarious infringement.

The license agreement was itself the offspring of a serious and substantial controversy commencing in 1946. USI's predecessors (Olsco and Garrett) were contending at that time that their former sales representatives (Mills and Carlisle), the principal organizers of Camco, Inc., were infringing King 487. This followed the traditional pattern of threatened infringement suits and extended discussions looking toward a satisfactory disposition. All such negotiations were carried on by counsel between themselves. Out of that came a proposal for a license contract which, after passing through several drafts in the period from March to May 1947, resulted in the contract of June 4, 1947, with which we deal.14

The contract, in the whereas clause, described the controversy. It recited the charge that Camco was infringing 487 by "the manufacture and sale by Camco * * * of a valve illustrated in the print marked Exhibit `A'." It also charged infringement because of the activities of Camco * * * in * * * causing to be set up and operated a certain system in wells employing said valves and also a similar system in wells employing valves of the type shown in the print marked Exhibit `B'." It expressed their mutual desire "to settle and compromise their differences." Then followed its four principal undertakings. In Article I Camco, for the life of the license agreement, admitted the validity of 487 and that "the manufacture and sale of valves of the type shown in * * * Exhibit `A'" was an infringement. Article III was a release of Camco from all claims "because of past infringements by Camco * * * of the said King patent" 487. Article IV made the contract binding on the successors and assigns of each. As our dispute centers around Article II, the main clause, we set it out in full but with numbers in brackets inserted for ease of discussion:

"Olsco and Garrett hereby grant unto Camco, * * *, a fully paid up, non-exclusive, non-assignable right and license to [1] manufacture and [2] sell and [3] to use [4] in accordance with any system claim of the * * * King Patent [5] the valves shown in * * * Exhibit `B' * * and [6] any other similar valve [7] operated by pressure exerted on a bellows in which no seal is effected upon a predetermined distortion of the bellows from pressure acting upon the surface thereof for protecting the bellows against excessive distortion due to increases in pressure of the operating fluid beyond the pressure necessary to actuate the valve; [8] it being specifically understood and agreed that no license is granted for the manufacture, use or sale of valves of the type shown in Exhibit `A' * * * nor [9] of any bellows actuated valve in which a seal is effected upon a predetermined distortion of the bellows whereby the bellows is protected against excessive pressure acting upon the surface thereof due to increases in pressure of the valve operating fluid beyond the pressure necessary to actuate the valve, [10] and it being further understood and agreed that no license is granted for the manufacture, use or sale of any improvement in valves [11] which has been or may be made or acquired by Olsco and Garrett or either of them. [12] The license herein granted shall be for the life of the aforesaid King Patent No. 2,339,487, provided, however, [13] that in the event that by a decision of a Court of competent jurisdiction unappealed from Camco, Carlisle and Mills shall be held to have infringed the said King Patent after the execution of this agreement by the manufacture, use or sale of structures within the scope of said patent and outside the scope of the license herein granted, Olsco and Garrett may at their options thereupon terminate this license."

On USI's theory, the lettered notation on Exhibit B15 is likewise of importance. It stated:

"Note: All valves in a setting have bellows charged to same pressure. Differential adjustment is made by adjusting the spring."

In the process of interpreting the contract, we are not much aided by the formalized rules applicable to Texas contracts.16 But construing it as a whole, as we must, with the object of a reasonable, practical interpretation unless the terms prevent it, we agree with the District Court that Camco's actions are within the license. Our reasons will best appear and the discussion will be shortened by treating the problem against the specific charges of vicarious extra-license infringement.

Infringement of Claims 10, 11, 13 Pressure Step-down Differences From Bellows Charge Only

It is undisputed that Camco has used bellows valves in a King system with the difference in pressure, top to bottom, being fixed by differences in the sealed pressure charge of each valve. It is USI's contention that, covered as it unquestionably is by claims 10, 11, 13, Camco has no right to use this method and hence infringes. Indispensable to this assertion is a literal application of the Note on Exhibit B as a restriction on authorized use. For the grant is a license to [1] manufacture and [2] sell and [3] to use [5] "the valves shown in * * * Exhibit `B'" [4] "in accordance with any system claim of the aforesaid King patent * * *." And the Exhibit "B" valve is, without a doubt, a sealed pressure charge bellows valve within the grant unless the Exhibit B Note17 limits it.

But this Note, appearing on drawings A and B, is too equivocal to give it any such interpretation unless other factors compel that result. Without disparaging the final, written memorial of the agreement by parol evidence, either directly or in a left-hand fashion, it is an uncontradicted fact that these drawings were not prepared for this contract. They were reductions of drawings used for sales purposes. The note was on the drawings before they were put in Camco counsel's hands. The drawings with the accompanying memoranda, see note 15, supra, first entered the picture to describe a modification in design or manufacture in order to justify (quite apart from a settlement agreement) that this would remove the basis for alleged infringement as it eliminated the protective seal on the bellows. When the parties came to formalizing a compromise settlement thrashed out by months of negotiations, the drawings, bearing this Note, were a handy thing to describe and define the structure permitted and the structure prohibited. This is borne out by the fact that Exhibit "A" carried the same note. If it were meant as a limitation on the ultimate manner in which the valve was to be used in a King system, it was superfluous on Exhibit "A" drawing for the contract expressly prohibited such valves.18

Importing an engineering draftman's notation, dramatically demonstrated to be superfluous on a parallel drawing, would result in a substantial change in the broad words of the license. No longer would it be the grant of the right to manufacture, to sell, to use and to sell for use by others pressure charged valves of "the type shown in the print marked Exhibit B" [4] "in accordance with any system claim" of 487 (emphasis added). Instead clause [4] would then read "in accordance with any system claim (except claims 10, 11 and 13) of the * * * King patent."

We agree that the Note may not have any such limitation on the grant expressed in such sweeping terms.

Infringement of System Claims By Valves Which Are

(A) Pressure Loaded Without Springs

(B) Adapted for Wire Line Retrievable Operations

While mechanically these two groups are different and require separate appraisal on similarity, they present substantially one problem on contract application. It is also important to keep in mind that while it is valves we talk about, the alleged extra-license infringement under this subdivision does not come about from infringement of valves claims.19

We think "similar" was meant to, and should, have a broad meaning as used in this contract. It is evident that these highly skilled patent solicitors, the able votaries for these experienced litigators, purposefully chose a term far removed from their esoteric arsenal. They did not use the word "equivalent" which has its own settled unsettled meaning to the initiate. What they are trying to describe was a structure which did operate on the principle of a pressure charged bellows provided only that it did not encroach upon what Garrett thought to be the indispensable key to successful gas lift operation — the seal to protect the bellows against too violent an opening.

It was the nature of the valve — sealed pressure charged bellows type — which had at once precipitated the controversy and then became the standard of reference selected by the parties. Obviously they were not concerned with external appearance or physical characteristics apart from this. Any other construction simply makes no practical sense. At that late date, with a thriving and growing industry in gas lift operations marked by parallel agitation if not actual litigation testing, challenging, resisting, attacking this succession of devices, parties such as Camco knew of the vast improvements for retrievable valves. The considerations were not all running one way. Camco presumably had much to gain, but it had much to lose if it were to be held rigidly to a valve which merely looked like Exhibit "B". For by the settlement it lost the coercive power either to challenge or threaten to challenge validity or to gain the fruits of any such course through an even wider license at a subsequent date.

The contention is even weaker as to the use of pressure loaded bellows only. The structure portrayed in drawings A & B was a bellows pressure loaded valve which operated in conjunction with a metal spring. One function of the metal spring was to permit more ready field adjustments (generally within the limits of 100 (p.s.i.). The contention finally leads back to the Exhibit "B" Note theory, see note 17, supra. The reasoning runs somewhat like this. Since the Exhibit "B" special Note requires that pressure differential be achieved by adjusting the metal spring, there can be no adjustment unless there is a spring. Since the new type valve has no spring, it cannot be adjusted and is, therefore, unfit for use in a King system series requiring adjustment. From that the conclusion is reached that since a valve would be unusable, it is unthinkable that the parties contemplated that such a valve could be made or sold or used by Camco. The whole argument falls, of course, with the Exhibit "B" Note theory.

Thus far in assaying the particular devices claimed by USI to constitute extra-license infringement, our problem of construction has not required that we look upon the grant as anything more than a license for system claims. We have been able to assume that USI is correct that the right to [1] manufacture, the right to [2] sell, and the right [3] to use are all in conjunction with use [4] "in accordance with any system claim of the * * * King patent." In other words, the grant is for system claims only. So far, the problem has been merely to decide whether, in a system use, the valves are those [5] shown in Exhibit "B" or [6] similar pressure charged valves.

We must now face the question of valve claims.

There is no dispute that Camco has made and sold bellows type valves with dampener baffles. We accept the finding of the District Court that in the absence of the license, the dampeners would have constituted infringement of valve claims 4, 8 and 9.

The trial judge reasoned in this fashion. The license agreement grants to Camco a license to manufacture and sell the valves shown in Exhibit "B" and any other similar valves operated by pressure charged bellows. The license, of course, has usefulness only to the extent that it permits conduct which otherwise would be an infringement of some claim of the patent. Valve claims are limited to 4, 8 and 9 in one group and 3 and 12 in the other.20 Since 3 and 12 were admittedly and expressly excluded, the only valve claims remaining are 4, 8 and 9.

We arrive at the same conclusion though by a somewhat different process of contract interpretation. The analysis results, of course, in a basic conclusion that the grant is not, as USI contends, limited to system claims only.

The heart of USI's basic thesis is, of course, the assertion that the clause [4] "in accordance with any system claim of the * * * King patent" relates to and modifies all three rights which preceded in the sentence structure. Hence, it says, the right to [1] manufacture, the right to [2] sell the [5] Exhibit "B" or [6] similar [7] pressure operated valves is limited to the [3] use [4] "in accordance with any system claim * * *." But even if this were accepted it would not necessarily lead to a finding of vicarious infringement. For the evidence amply supports the trial court's conclusions, expressed or implied, that these accused valves were sold by Camco with the expectation and purpose that they would or might be used in a series system [4] "in accordance with any system claim." USI's thesis, therefore, requires a further step. That is, that since all the privileges under the license ( [1], [2], [3], [5], [6], [7] ) are tied to [4] which shows a major intention to cover system rights only, and as valves are not the immediate subject of the grant, the trial court's process of reasoning is inapplicable since it is in reality an effort to make an assumed grant of valve rights effectual.

Of course, the difficulty of any such process of mechanical analysis is that which unavoidably inheres in so much of judicial adjudication — at one step or another, whether lurking undisclosed or frankly recognized, one of the supporting reasons almost assumes the existence of the conclusion. For example, USI's thesis is virtually unanswerable if, but the if is a big one, it is first decided that the grant is for system claims only. On the other hand, the analysis we follow seems impregnable once the interim decision is made that to [1] manufacture and to [2] sell, [5] valves means just what it says and was therefore intended to cover valves as well.

That requires the search for other factors which tend to give weight to one or the other of the two divergent subsidiary conclusions. We find them here largely in the extreme caution exercised in describing what kind of valves could not be manufactured. To put it another way, the grants seem clearly to say that Camco may manufacture any pressure charged bellows type valve so long as (a) it operates on the principle of the Exhibit "B" valve, (b) it does not have a seal to protect the bellows and (c) the differences (or changes) from Exhibit "B" valves are not the result of [10] "any improvement" which [11] "has been or may be made or acquired by Olsco and Garrett or either of them."

The prohibition that [8] "no license is granted for the manufacture, use or sale of * * * Exhibit `A'" valves is also a significant factor. The rights are there stated disjunctively so that the right to manufacture, to sell, to use is not tied to use in a King system installation. Forbidding the disjunctive rights with respect to Exhibit "A" valves or those [9] with seal protected bellows permits the inference that it was intended that those same disjunctive rights would exist as to valves not within the prohibition. The similar prohibition that [10] "no license is granted for the manufacture, use or sale of any improvement in valves" has like significance. As with [8] the rights referred to are in the disjunctive. Moreover, the object is referred to as "any improvement in valves" which encompasses more than the Exhibit "B" type of valves. All of these things add up to the convincing impression that Camco, known by Garrett to be a formidable competitor, was expected vigorously to engage in the manufacture and sale of bellows type valves. This meant that to meet the demands of an expanding industry, Camco would make many changes and improvements. It was the nature of such improvements that they sought so clearly to restrict. Under no circumstances could they (1) provide a protective seal to the bellows or (2) be an improvement which the grantors had developed or might develop.

That leaves, then, only the narrow question whether the use of the dampener baffles described in claims 4, 8 and 9 were within the prohibited class of [10] "improvement in valves which [11] has been or may be acquired by Olsco and Garrett." Here the choice by these patent solicitor-attorney-negotiators of the term "improvement" is significant, especially in the light of their careful avoidance of a patent term of art in the use elsewhere of the word "similar." In the patent field it is certainly a comparative term and connotes some antecedent thing to be improved.21 USI has to argue, however, that the phrase "has been or may be" refers to existing as well as to future improvements, and since the dampener baffles were an improvement over pre-existing structures (otherwise they would not have been patentable in claims 4, 8 and 9), it encompasses the improvements disclosed by King 487 as well as extraneous patents or developments. Of course, if this were acceptable, then the express prohibition against the manufacture of the Exhibit "A" type valve and the repeated prohibition against the manufacture of a valve with a seal protecting the bellows would have been quite superfluous. That is so because without any question, the parties are in agreement that the patent does claim, and Garrett meant to deny to Camco, the novel improvement of a seal protecting the bellows. We need not seek to determine whether the term "improvement" had all of the connotations of the patent are and had to have, therefore, the essential characteristic of a patentable novelty over a pre-existing device. Whether so limited or not, it is clear that as used here it referred to changes, betterments, modifications, or adaptations thought to improve which were disclosed outside of King 487. This would comprehend structures or devices covered in other patents or by other practices. As to all such non-King 487 "improvements" the prohibition applied without regard to whether the grantors owned or acquired them in the past or future.

Finally, we agree also with Camco's contention that the interpretation followed here is corroborated here by the conduct of the parties and the practical interpretation they put upon it.22 Not using laches as such, we can accept the Court's finding that USI for a number of years had knowledge that most of these practices now complained of were being carried on by Camco.23 In the litigious atmosphere out of which this relation was born and the speed with which criticisms were made at other times, USI's silence was a powerful manifestation that USI considered that what Camco was doing was right. What the parties thought was right and was what the District Judge said was right.

The result is that we approve the conclusion reached that there was no vicarious infringement and the acts of Camco were within the scope of the license.

Affirmed.