Panther Pumps & Equipment Co., Inc. v. Hydrocraft, Inc.

• Decision Date: 15 December 1977
• Docket Number: No. 77-1142,77-1142
• Citation: 566 F.2d 8,196 USPQ 81
• Parties: PANTHER PUMPS & EQUIPMENT COMPANY, INC., now Morrison Pump Co., Inc., Plaintiff, v. HYDROCRAFT, INC., Paul W. Schlosser and Edward Drath, Defendants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 8

566 F.2d 8

196 U.S.P.Q. 81

PANTHER PUMPS & EQUIPMENT COMPANY, INC., now Morrison Pump

Co., Inc., Plaintiff, v. HYDROCRAFT, INC., Paul W. Schlosser and Edward Drath, Defendants.

No. 77-1142.

United States Court of Appeals, Seventh Circuit.

Argued May 24, 1977.

Decided Nov. 1, 1977.

Rehearing and Rehearing In Banc Denied Dec. 15, 1977.

Roy E. Petherbridge, Edward D. Gilhooly, Chicago, Ill., for plaintiff.

James A. Baker, Timothy M. Bittel, Cleveland, Ohio, for defendants.

Before SWYGERT and CUMMINGS, Circuit Judges, and MARKEY, Chief Judge. ¹

MARKEY, Chief Judge.

Appeal under 28 U.S.C. § 1291 by Panther Pumps & Equipment Co., Inc. (Panther) from an order of the district court, 424 F.Supp. 815 (N.D.Ill.1976), which: (1) discharged an order to show cause why appellee Louis Beck (Beck) should not be held in civil contempt for violating a November 24, 1970 permanent injunction against patent infringement; (2) denied Panther's motion to add or substitute Beck and Universal Spray Systems, Inc. (Universal) as defendants; and (3) denied Panther's motion to reopen the contempt hearing for additional testimony. We vacate the district court's order and remand the case with instructions.

Background

In February, 1967, Panther began what became a protracted patent case ² by filing a complaint for infringement, seeking an accounting and an injunction against Hydrocraft, Inc. (Hydrocraft) and two officers of Hydrocraft, Paul W. Schlosser and Edwin H. Drath. Beck was not named as a defendant, but he, with Schlosser and Drath, had organized Hydrocraft in 1966. Beck was president and, like Schlosser and Drath, was a one-third owner of Hydrocraft's corporate stock.

In 1970, the case was tried before a jury, which found claim 23 of U. S. Patent 3,254,845 ('845 patent) and claim 19 of U. S. Patent 3,367,270 ('270 patent), valid. The claims respectively define a paint spraying system and pump. Defendant Schlosser made both inventions while employed by Panther, to which he assigned both patents.

Finding Hydrocraft's manufacture and sale of its SPRAYMATE pump an infringement, the jury awarded $150,000 in damages against Hydrocraft and $5000 in damages against each of defendants Schlosser and Drath. Acting under Fed.R.Civ.P. 58, the clerk entered judgment on September 21, 1970. Defendants moved for withdrawal of judgment.

On October 8, 1970, while the motion for withdrawal was pending, Beck, Schlosser, Drath, and their attorneys met in Chicago to discuss the effect of the judgment and the forthcoming injunction. The attorneys advised that the injunction would preclude Hydrocraft's manufacture and sale of the SPRAYMATE domestically.

Schlosser and Drath testified in this contempt proceeding that, during the Chicago meeting, Beck announced a plan to keep Hydrocraft's assets out of the reach of Panther. He (Beck) would set up Universal Spray Systems with a foreign base * * * and keep the Hydrocraft, Inc. assets out of reach of seizure.

Schlosser recalled that "Beck was going to take the assets and he was going to start the new corporation with them in Europe and start the company and pay off the bills, and that was it." Drath's post-meeting notes, summarizing the matters discussed, included:

On November 24, 1970, the district court denied the motion for withdrawal and entered final judgment and a permanent injunction against Hydrocraft, Schlosser, and Drath, and awarded damages as found by the jury. The court enjoined Hydrocraft, "its divisions, subsidiaries, officers, agents, servants, employees, successors, (and) assigns * * * directly or indirectly" (emphasis added) from further infringement. The injunction further stated:

As used herein the term "infringing product" means any product covered by Claim 23 of the United States Letters Patent No. 3,254,845 and any product covered by Claim 19 of the United States Letters Patent No. 3,367,270, any colorable imitation or equivalent thereof, including, but not limited to, the product identified in the captioned case as Defendants' "SPRAY MATE PUMP" of Plaintiff's Exhibit 89.

Carrying out his plan to avoid seizure, Beck shipped eleven tons of SPRAYMATE parts, constituting substantially all the assets of Hydrocraft, to Cleveland. ³ The parts were consigned to "Becks Spray Systems, Inc.," a company under Beck's control, in three shipments on November 30, 1970, on December 2, 1970, and on January 5, 1971.

On December 18, 1970, defendants filed their notice of appeal to this court.

Pursuant to a discussion at the Chicago meeting, Beck paid Schlosser and Drath $100 each for their Hydrocraft stock on January 8, 1971, and became the sole shareholder of Hydrocraft on that date.

Also on January 8, 1971, Beck formed Universal as a new Ohio corporation with himself as the president and sole shareholder. The SPRAYMATE parts inventory of Hydrocraft was transferred from Becks Spray Systems, Inc. to Universal and shown as an asset on Universal's books. In March, 1971, using those SPRAYMATE parts, Universal began making and selling a slightly modified version of the SPRAYMATE pump, identified as the SPRAYMATE Model B (SPRAYMATE B).

On April 19, 1971, Hydrocraft (now wholly-owned by Beck) sought relief from judgment under Fed.R.Civ.P. 60(b), basing the motion on a newly-discovered German patent reference. The district court denied the motion on June 10, 1971.

On appeal, this court affirmed the judgment of validity, infringement, and the award of $150,000 in damages against Hydrocraft, but reversed the judgment for damages against Drath and Schlosser. Panther Pumps & Equipment Co., Inc. v. Hydrocraft, Inc., 468 F.2d 225 (7th Cir. 1972). A petition for writ of certiorari was denied. 411 U.S. 965, 93 S.Ct. 2143, 36 L.Ed.2d 685 (1973).

In 1975, Panther's counsel learned from Schlosser and Drath of the transfer of assets and of the manufacture and sale by Universal of the SPRAYMATE B. ⁴ In October, 1975, Hydrocraft's charter was cancelled by the State of Ohio for failure to pay franchise taxes.

The Contempt Proceeding Below

On February 3, 1976, Panther moved for an order to show cause why Beck should not After examination of the affidavits and memoranda, I conclude that Beck is bound under the terms of the injunction as an officer and agent of Defendant Hydrocraft, Inc. The injunction further prohibits officers and agents from "assisting others either directly or indirectly" in infringing the patent(s). It is therefore immaterial whether Beck personally or a corporation he controls is alleged to have violated the injunction.

be held in contempt for violating the injunction of November 24, 1970. The district court issued such an order and Beck moved to vacate. Ruling on March 31, 1976, the district court held that it had jurisdiction over Beck and that he was bound by the injunction, stating:

Nonparties may be found in contempt of an injunction provided that they have actual notice of the injunction and aid or abet in its violations. (Citing authorities.) Once an injunction has issued, all that is necessary to bind those named is to notify them of the injunction. (Citing authorities.) Plaintiff's affidavits and the record as a whole establish that Beck had notice of the injunction.

In any case, it appears that Beck transacted business in Illinois within the meaning of Chapter 110, Section 17 of the Illinois Revised Statutes. He may therefore be made subject to this Court's jurisdiction pursuant to Rule 4(e) of the Federal Rules.

Prior to the contempt hearing, Panther moved under Fed.R.Civ.P. 25(c) ⁵ to substitute or add Beck and Universal as defendants in the original suit. At the hearing, the district court received evidence on the transfer of assets and ordered that the issue be briefed.

An understanding of the contempt issue is facilitated by a brief review of the patented subject matter. The patents are directed to an improved paint spraying system, particularly the pump, and to elimination of the detrimental heating of the pump during "standby" operation, i. e., when the painter turns off the spray nozzle without stopping the pump motor.

The pump structure itself includes a housing divided into two chambers by a flexible diaphragm. One chamber is connected to a paint supply and to a spray gun. As the diaphragm cycles back and forth in the chamber, paint is drawn into that chamber and expelled therefrom to the spray gun. To move the diaphragm, the other chamber contains a driving fluid (ethylene glycol) acted upon by a reciprocating, motor-driven piston. On the forestroke of the piston, pressure applied to the ethylene glycol by the piston pushes the diaphragm; on the backstroke, suction withdraws the diaphragm. A piston shaft extends from the housing for connection with a motor.

During standby operation, paint drawn into the paint chamber can no longer be expelled because the spray gun nozzle is closed. The paint chamber becomes filled with paint and prevents diaphragm movement. Because ethylene glycol is practically incompressible, something must give to permit the piston to continue moving. Prior art devices continuously recirculated either paint through the paint chamber or driving fluid through the driving fluid chamber. The motor worked as hard as in the painting operation, and the fluid became hot from recirculation, requiring auxiliary cooling equipment.

Schlosser discovered that reduced motor work and heat buildup could be achieved by a return of less driving fluid on the piston backstroke than that expelled on the forestroke. The need for auxiliary cooling equipment was eliminated. The patents theorize that on the piston backstroke, because the chamber expands to a volume greater than that of the driving fluid, "cavities" will be formed within the driving fluid, requiring less work from the motor Claim 23 incorporates claims 22 and 1 and defines the entire system:

during standby operation. It was also theorized that "some" of the driving fluid will change from...