U.S. Valves v. Dray Sr.

• Decision Date: 22 May 2000
• Parties: (Fed. Cir. 2000) U.S. VALVES, INC., Plaintiff-Cross Appellant, v. ROBERT F. DRAY, SR., Defendant-Appellant, and INTEGRATED MOLDING TECHNOLOGIES, Defendant. 99-1586, -1587 DECIDED:
• Court: U.S. Court of Appeals — Federal Circuit

Page 1368

212 F.3d 1368 (Fed. Cir. 2000)

U.S. VALVES, INC., Plaintiff-Cross Appellant, v. ROBERT F. DRAY, SR., Defendant-Appellant, and INTEGRATED MOLDING TECHNOLOGIES Defendant.

99-1586, -1587

United States Court of Appeals for the Federal Circuit

DECIDED: May 22, 2000

Appealed from: United States District Court for the Southern District of Indiana Judge Richard L. Young

Katharine V. Jones, of Evansville, Indiana; and Gary K. Price, Johnson, Carroll and Griffith, of Evansville, Indiana, argued for plaintiff-cross appellant.

F. Stephen Sheets, of Evansville, Indiana, argued for defendant-appellant. Of counsel on the brief was Mark D. Perdue, The Zisman Law Firm, PC, of Dallas, Texas.

Before MICHEL, CLEVENGER, and RADER, Circuit Judges.

RADER, Circuit Judge.

Robert F. Dray, Sr. (Dray) exclusively licensed his patent to U.S. Valves, Inc. in 1991. After his business relationship with U.S. Valves deteriorated, Dray himself began manufacturing and selling valves with the patented technology. U.S. Valves sued Dray for breach of contract, claiming that Dray sold valves covered by the licensed patents. Dray counterclaimed, seeking an accounting and damages for unpaid royalties. The district court found that Dray had sold valves in violation of the agreement, issued a permanent injunction barring Dray from making any further sales, and awarded U.S. Valves damages of $241,351.17. See U.S. Valves, Inc. v. Robert F. Dray, Sr., EV-96-66-C-Y/H (S.D. Ind. Oct. 13, 1998) (Dray I). Dray appeals the judgment. U.S. Valves appeals the amount of the damages award. Because the trial court correctly ascertained liability, but misapplied important principles of calculating damages, this court affirms-in-part, reverses-in-part, and remands.

I.

On September 29, 1992, the U.S. Patent and Trademark Office issued U.S. Patent No. 5,151,282 (the '282 patent) to Dray for the "internal piston valve," which regulates the flow of molten plastic in an injection-molding process. Dray continued-in-part his original patent application and later received U.S. Patent No. No. 5,258,158 on November 2, 1993. The application for the latter patent was also continued-in-part and resulted in Dray's U.S. Patent No. 5,470,514 on November 28, 1995.

To exploit his invention, Dray, his son Bobby Dray, and Brian Ricci jointly formed U.S. Valves in September 1991. Dray was the majority shareholder and Bobby Dray was in charge of operations. The following month, Dray and U.S. Valves, Inc. completed a license agreement in which Dray granted U.S. Valves "an exclusive right to manufacture, use, sell, advertise and distribute the Licensed Product and to practice and commercialize invention [sic] and any patent thereon and to use the Know-How developed by the Licensor". License agreement, § 1.1. This agreement defined the "Licensed Product" as "the invention disc[ ]losed by the application(s) referred to in Recital A and in patents which issues there from [sic]." Id. § 1.5. This license agreement also specified: "All future improvements, modifications or enhancements of the Licensed Product made by the Licensor shall be Licensed and shall, without payment of additional consideration, be made available to the Licensee . . . ." Id. § 5.1. Dray admits that the licensing agreement licensed his three patents to U.S.Valves.

The agreement also obligated U.S. Valves to pay Dray a royalty equal to "twenty percent . . . of the Net Selling Price of the Licensed Product sold by Licensee." Id. § 4.3. The agreement gave Dray a way to assure correct royalty payments because U.S. Valve agreed to keep "complete and accurate" records, and to make them available "at all reasonable times . . . for inspection and copying by Licensor." Id. § 4.5.

In January 1994, Bobby Dray asked his father to reduce his royalty rate from twenty to fifteen percent on sales to Van Dorn DeMag, Inc. (Van Dorn). This price reduction allowed U.S. Valves to obtain an order from this prospective new customer. Although Bobby Dray made notes concerning the agreement with Van Dorn, the agreement itself was not memorialized in writing. When the relationship between Dray and U.S. Valves later dissolved, this agreement became the focus of a major dispute. Dray asserts that he agreed to a reduction in royalty only for an initial order from Van Dorn; U.S. Valves asserts that the reduction applied to all sales to Van Dorn.

Van Dorn began to buy valves from U.S. Valves in October 1994. At about the same time, however, disagreements arose between the Drays and Ricci. Ricci purchased Dray's stock in U.S. Valves, and Bobby Dray left U.S. Valves. By the end of 1994, Dray was completely dissociated from U.S. Valves except for the license agreement.

In August 1995, Dray began selling the "Licensed Product" of § 1.5 of the license agreement, which the district court called "the Dray valve," himself. Dray I, slip op. at 9. At some point Dray also began to produce and sell another valve - the "sliding ring" valve - which serves the same purpose as the Dray valve. Dray asserts that the sliding ring valve is "substantially different" from the valve covered by the license agreement, and applied for a patent on the sliding ring valve on May 4, 1998. U.S. Valves, on the other hand, claims that the sliding ring valve is sufficiently similar to the Dray valve to be covered by the license agreement. See U.S. Valves, Inc. v. Robert F. Dray, Sr., 190 F.3d 811, 812 (7th Cir. 1999) (Dray II).

In October 1995, Dray asked U.S. Valves for information allowing him to verify his royalty payments, and received information on U.S. Valves' sales and royalties from April through September 1995. On November 17, 1995, Dray attempted to verify his royalty payments by personally inspecting U.S. Valves' accounts. He was unsatisfied by the information he was able to obtain. Consequently, on November 29, 1995, he notified U.S. Valves of his perception that it had violated the license agreement by paying royalties at less than the twenty percent rate in the license agreement. See Dray I at 10. This perception arose from Dray's understanding of the January 1994 oral agreement with Bobby Dray.

In fact, U.S. Valves paid royalties to Dray on sales to Van Dorn at a fifteen percent rate until November 1995. See id. at 11. In December 1995, U.S. Valves wrote a check for the disputed amount to Dray, but required that he sign a release for "any claim he may have in connection with non-conforming royalties for sales to Van Dorn Demag, Inc., from January 1994 to present." Id. at 12. Dray neither signed the release nor cashed the check. Instead, by this time, Dray had himself begun selling products covered by the license agreement, and therefore notified U.S. Valves that he considered the company to have violated the license agreement. He considered the proffer of the disputed amount in the Van Dorn matter a violation by U.S. Valves of their agreement, which granted Dray the right to inspect U.S. Valves' records at "all reasonable times."

On December 21, 1996, U.S. Valves sued Dray in Indiana state court, alleging breach of contract due to his manufacture and sale of valves covered by the license agreement. U.S. Valves also requested the court to enjoin Dray from violating U.S. Valves' rights under the license agreement. On April 4, 1997, the suit was removed to the United States District Court for the Southern District of Indiana on Dray's motion, on the basis of diversity under 28 U.S.C. § 1332 (1994). See Dray I, slip op. at 1. Dray counterclaimed, seeking an accounting of, and damages for, unpaid royalties. On June 5, 1997, the district court issued a preliminary injunction that enjoined Dray "from violating U.S. Valves' exclusive rights under the license agreement, including its rights to continuations-in-part of the '282 patent." U.S. Valves v. Robert F. Dray, Sr., EV-96-66-C-H-/H, slip op. at 1 (S.D. Ind. June 5, 1997) (Dray III). Just over a year later, the district court issued Dray I, finding that Dray had violated the license agreement. The district court awarded damages and attorney fees of $241,351.17 to U.S. Valves, and permanently enjoined Dray from "selling the Dray valve (including the continuation-in-part valves) covered under the license license agreement." Dray I, slip op. at 28.

Both parties appealed Dray I to the United States Court of Appeals for the Seventh Circuit. Dray asserted that the district court erred in its calculation of damages and in its finding that Dray had sold licensed product after June 5, 1997. Dray also appealed the district court's determination that he was liable for violating the license agreement. U.S. Valves appealed the amount of the damages award, asserting that it was insufficient to compensate for future harm. Dray later asked the Seventh Circuit to transfer the appeal to this court because U.S. Valves' claim for breach of contract requires application of patent law. See Dray II, 190 F.3d at 812. The Seventh Circuit granted Dray's motion.

II.

Jurisdiction is the first issue before this court. See, e.g., Bender v. Williamsport Area Sch. Dist., 475 U.S. 534, 541 (1986) ("[E]very federal appellate court has a special obligation to satisfy itself not only of its own jurisdiction, but also that of the lower courts in a cause under review, even though the parties are prepared to concede it."). Under 28 U.S.C. § 1332 (1994), a regional circuit has jurisdiction over appeals based on diversity jurisdiction in the district court. Under 28 U.S.C. § 1295(a)(1) (1994), this circuit has jurisdiction over appeals arising under patent law in a district court. Patent law jurisdiction "extends only to those cases in which a well-pleaded complaint establishes either that federal patent law creates the cause of action or that the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal patent law, in that patent law is a necessary element of one of the well-pleaded...