Panduit Corp. v. Stahlin Bros. Fibre Works, Inc.

Citation575 F.2d 1152,197 USPQ 726
Decision Date25 April 1978
Docket NumberNo. 75-2417,75-2417
PartiesPANDUIT CORP., Plaintiff-Appellant, v. STAHLIN BROS. FIBRE WORKS, INC., Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

Roy E. Petherbridge, Petherbridge, Lindgren & Gilhooly, Chicago, Ill., Charles R. Wentzel, Tinley Park, Ill., for plaintiff-appellant.

A. James Valliere, Hill, Gross, Simpson, Van Santen, Steadman, Chiara & Simpson, Chicago, Ill., for defendant-appellee.

Before PHILLIPS, Chief Circuit Judge, CELEBREZZE, Circuit Judge, and MARKEY, Chief Judge of the Court of Customs and Patent Appeals. *

MARKEY, Chief Judge.

Appeal from a judgment of the district court, Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., C.A. Nos. 4935 and G293-71 (W.D.Mich. Sept. 15, 1975), adopting, with an unpublished opinion, the report of the special master awarding plaintiff, as damages for patent infringement, a reasonable royalty of 21/2%. We reverse and remand.

Litigation Background

In 1964 plaintiff Panduit Corp. (Panduit) sued defendant Stahlin Bros. Fibre Works, Inc. (Stahlin) for infringement of Panduit's Walch patent No. 3,024,301, covering duct for wiring of electrical control systems. In 1969, the district court found claim 5 valid and infringed by the "Lok-Slot" and "Web-Slot" ducts made and sold by Stahlin, enjoined Stahlin from further infringement, and ordered an accounting. 298 F.Supp. 435, 162 USPQ 114 (W.D.Mich.1969). That judgment was affirmed on appeal. 430 F.2d 221, 166 USPQ 524 (6th Cir. 1970), cert. denied, 401 U.S. 939, 91 S.Ct. 932, 28 L.Ed.2d 218, 168 USPQ 673 (1971).

Thereafter, the district court adjudged Stahlin in contempt of the court's injunction, because of Stahlin's making and selling the "Tear Drop" duct, a colorable imitation of the infringing "Lok-Slot," 338 F.Supp. 1240, 172 USPQ 650 (W.D.Mich.1972). That judgment was also affirmed on appeal. 476 F.2d 1286, 178 USPQ 12 (6th Cir. 1973).

In 1971, the district court appointed a master to determine Panduit's damages pursuant to 35 U.S.C. § 284, 1 to take evidence, and render a report on the issues of treble damages, interest, costs, and attorney fees. The district court, in adopting in toto the master's report, considered the master's findings of fact not clearly erroneous, and stated that "the Master had correctly applied the law to the circumstances of this case." The report recommended $44,709.60 in damages, based on a royalty of 21/2% of gross sales price, the percentage being calculated on Stahlin's testimony that its normal profit on all of its products was 4.04% and the concept that a "reasonable royalty" entailed some level of profit to the "licensee." Horvath v. McCord Radiator and Mfg. Co., 100 F.2d 326 at 335, 40 USPQ 394 at 403 (6th Cir. 1938), cert. denied, 308 U.S. 581, 60 S.Ct. 101, 84 L.Ed. 486, 43 USPQ 520 (1939).

Fact Background

The duct manufactured by Panduit was invented by its president, Jack Caveney. Panduit began to make and sell the duct in 1955, and Caveney applied for a patent in 1956. In an interference proceeding in the Patent Office, it was determined that Walch, an employee of General Electric, was the first inventor of the duct. A patent issued to General Electric, as Walch's assignee, on March 6, 1962. Panduit then acquired the Walch patent from General Electric and established a firm policy of exercising its right to that patent property, i. e., of the right to exclude others from making and selling the patented duct.

Stahlin began to manufacture and sell the "Lok-Slot" and "Web-Slot" ducts in 1957, and continued to do so after issuance of the Walch patent and its sale to Panduit in 1962. On January 1, 1963, Stahlin introduced a price cut of approximately 30% on its "Lok-Slot" and "Web-Slot" ducts.

Panduit seeks $808,003 as damages for lost profits on lost sales over the period March 6, 1962, the date of first infringement, to August 7, 1970, the effective date of the initial injunction; 2 or, alternatively, a 35% reasonable royalty rate yielding $625,940. In addition, Panduit seeks $4,069,000 in profits lost on Panduit's own sales because of Stahlin's price cut.

Issue

The dispositive issue is whether the master's determination of a reasonable royalty was in error.

OPINION

The statute, 35 U.S.C. § 284, requires that the patent owner receive from the infringer "damages adequate to compensate for the infringement." In Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476 at 507, 84 S.Ct. 1526, 1543, 12 L.Ed.2d 457, 141 USPQ 681 at 694 (1964), the Supreme Court stated:

But the present statutory rule is that only "damages" may be recovered. These have been defined by this Court as "compensation for the pecuniary loss he (the patentee) has suffered from the infringement, without regard to the question whether the defendant has gained or lost by his unlawful acts." Coupe v. Royer, 155 U.S. 565, 582, 15 S.Ct. 199, 39 L.Ed. 263. They have been said to constitute "the difference between his pecuniary condition after the infringement, and what his condition would have been if the infringement had not occurred." Yale Lock Mfg. Co. v. Sargent, 117 U.S. 536, 552, 6 S.Ct. 934, 29 L.Ed. 954. The question to be asked in determining damages is "how much had the Patent Holder and Licensee suffered by the infringement. And that question (is) primarily: had the Infringer not infringed, what would Patent Holder-Licensee have made?" (Citing Livesay Window Co. v. Livesay Industries, Inc., 251 F.2d 469, 471, 116 USPQ 167, 168 (5th Cir., 1958).)

Panduit argues that the district court erred (1) in denying Panduit its lost profits due to lost sales, or, in the alternative, a 35% reasonable royalty; and (2) in denying Panduit its lost profits from its own actual sales due to Stahlin's price cut.

Lost Profits Due to Lost Sales

To obtain as damages the profits on sales he would have made absent the infringement, i. e., the sales made by the infringer, a patent owner must prove: (1) demand for the patented product, (2) absence of acceptable noninfringing substitutes, (3) his manufacturing and marketing capability to exploit the demand, and (4) the amount of the profit he would have made. 3 R. White, Patent Litigation: Procedure and Tactics § 9.03(2). See, e. g., Bros. Inc. v. W. E. Grace Mfg. Co., 320 F.2d 594 at 598, 138 USPQ 357 at 358 (5th Cir. 1963) and Electric Pipe Line, Inc. v. Fluid Systems, Inc., 250 F.2d 697, 116 USPQ 25 (2d Cir. 1957).

It is not disputed that Panduit established elements (1) and (3). Regarding (2), the master found that: "The evidence clearly shows the existence of acceptable non-infringing substitute ducts which would have permitted the defendant to retain its customers." That finding, as discussed below, was in error. However, Panduit is not entitled to its lost profits on lost sales in this case because of its failure to establish element (4).

The district court upheld as not clearly erroneous the master's finding that "there was insufficient evidence from which a fair determination could be made as to the amount of profit plaintiff would have made on such sales."

Panduit's Achilles heel on element (4) is a lack of evidence on its fixed costs. Panduit alleges that its omission is overcome by other evidence and by General Electric Co. v. Sciaky Bros., Inc., 415 F.2d 1068, 163 USPQ 257 (6th Cir. 1969). Sciaky is distinguishable and therefore not controlling on fixed costs. The accounting presented by Sciaky's expert witnesses included some overhead expenses, but omitted others which those witnesses testified were general and "paid by Sciaky during the years in question and would not have been greater if these additional machines had been produced and sold by Sciaky." 415 F.2d at 1075, 163 USPQ at 262. General Electric (the infringer) disputed that theory, but offered no testimony to contradict it. The court held:

Whether Sciaky's accounting method was accurate or not was a matter to be decided on the basis of testimony in the hearing before the Master. This was the specific function of that hearing. We do not believe that this issue can properly be decided as a matter of law before this court on appeal.

415 F.2d at 1075, 163 USPQ at 262.

In the present case, Stahlin did dispute Panduit's accounting theory, presenting its own expert witnesses to contradict it. Under Sciaky, the accuracy of the patent owner's accounting method is "a matter to be decided on the basis of testimony in the hearing before the Master." The master here found, on the basis of the evidence before him, and the district court agreed, that Panduit's accounting theory was deficient. As was said in Sciaky:

(W)here the District Court adopts the Master's findings of fact, Fed.R.Civ.P. 52(a) provides that such findings "shall be considered as the findings of the court" which cannot be set aside unless "clearly erroneous."

415 F.2d at 1073, 163 USPQ at 260.

We realize, as noted in Sciaky, that Panduit's theory is "by no means novel in patent damage cases." 415 F.2d at 1075, 163 USPQ at 262. Nevertheless, there is no evidence of record sufficient to support a conclusion that the master's findings respecting Panduit's omission, whether of certain fixed costs or of certain variable costs, were clearly erroneous. 3

Panduit's argument that the master was required by Fed.R.Civ.P. 53(d)(3) 4 to require a statement taking into account its omitted costs is without merit. The rule is discretionary, not mandatory, and it was not an abuse of the master's discretion to refuse the requested statement.

On the issue of Panduit's lost profits on lost sales, we affirm the district court.

Stahlin's Price Cut

The district court upheld as not clearly erroneous the master's finding that: "Any loss in (Panduit's) profits due to the price reduction was more than compensated by the gain in profits due to the increase in plaintiff's sales volume because of the price reduction. Thus, the price reduction resulted...

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