Deere & Co. v. International Harvester Co.

Decision Date27 June 1983
Docket Number83-566,Nos. 83-565,s. 83-565
Citation710 F.2d 1551
Parties, 13 Fed. R. Evid. Serv. 1443 DEERE & COMPANY, Plaintiff-Appellee/Cross-Appellant, v. INTERNATIONAL HARVESTER COMPANY, Defendant-Appellant/Cross-Appellee. Appeal
CourtU.S. Court of Appeals — Federal Circuit

Stephen C. Neal, Chicago, Ill., argued for appellant. With him on the brief were Richard C. Godfrey and Andrew R. Running. John L. Cline, F. David AuBuchon and Robert L. Harmon, Chicago, Ill., of counsel.

Raymond L. Hollister, Moline, Ill., argued for appellee. With him on the brief were H. Vincent Harsha, Virgil Bozeman and John V. Patton, Moline, Ill. Also on the brief were Robert H. Fraser and Louis A. Mok, Los Angeles, Cal., of counsel.

Before MARKEY, Chief Judge, and DAVIS and BALDWIN, Circuit Judges.

BALDWIN, Circuit Judge.

This is a consolidated appeal from a judgment of the United States District Court

                for the Central District of Illinois, entered October 8, 1982, awarding Deere $28,462,664, or 15% of International Harvester's (IH) net sales of a corn-harvesting device (corn head) previously adjudged to infringe a patent owned by Deere.   Deere & Co. v. International Harvester Co., 658 F.2d 1137, 211 USPQ 11 (7th Cir.), cert. denied, 454 U.S. 969, 102 S.Ct. 514, 70 L.Ed.2d 386 (1981).  In an unpublished decision, the district court held that the 15% figure constituted a "reasonable royalty" pursuant to 35 U.S.C. Sec. 284, but denied Deere prejudgment interest on Deere's claim of patent infringement.  We affirm-in-part, reverse-in-part, and remand for further consideration
                
Background

A "corn head" is an apparatus commonly attached to a mobile crop-processing machine, or combine, for use in harvesting corn. Generally, a corn head comprises a series of gathering devices (row units) mounted side-by-side in the front of the combine at intervals corresponding to the spacing of corn rows in the field, thereby permitting the simultaneous harvesting of the rows and the continuous feeding of corn ears into the combine for further processing. The arrangement of combine with corn head is illustrated below:

NOTE: OPINION CONTAINS TABLE OR OTHER DATA THAT IS NOT VIEWABLE

In April, 1976, Deere instituted a suit for patent infringement as a result of the commercial introduction by IH two years earlier of its IH 800 series corn head. In 1978, the district court concluded that a patent assigned to Deere (Schreiner patent) 1 was valid and infringed by the IH 800 corn head. The district court enjoined further manufacture and sale of the IH 800 series and, moreover, awarded Deere treble damages (then undetermined), including interest, costs, and attorneys fees, on the ground that IH's conduct constituted an "exceptional case of wilful infringement."

During subsequent proceedings, including two appeals to the Court of Appeals for the Seventh Circuit, the district court's judgment on validity and infringement was sustained, but its ruling on the case's "exceptional" nature was reversed by the Seventh Circuit, which found "[n]o evidence of bad faith conduct" by IH. Thereafter, the cause was remanded to the district court for an accounting.

District Court Opinion

At the accounting trial, Deere argued that it had suffered lost profits with respect to approximately 21% of IH's production of the IH 800 series between 1974 and 1980. As to the remainder of IH's production, Deere contended it was entitled to a royalty of 20% of net IH sales (an average of about $270 per row unit), plus an award of prejudgment interest and an adjustment for inflation over the infringement period.

In response, IH opposed both an inflation adjustment and an award of prejudgment interest, and urged that Deere had not proved it had suffered a determinable amount of lost profits. Furthermore, IH argued that an "established royalty" of $7.50 per row unit (or, alternatively, a "reasonable royalty" in essentially the same amount) was applicable, with a ceiling on Deere's recovery of $1,000,000. In support of an established or reasonable royalty in the case, IH referred to various licenses in the farm equipment field, including a license covering the Schreiner patent granted in 1977 by Deere to White Motor Corporation, a competitor of Deere's which had held 3% or less of the market during the relevant period. The license agreement (White license), which was negotiated during the pendency of Deere's suit against IH, specified a royalty rate of something less than 1%, with decreases in the rate in the event one or more patent claims were held invalid in the course of Deere's action against IH. IH also presented evidence of two offers by Deere, made, respectively, in 1973, before IH commercialized the infringing IH 800 series, and in 1977, after Deere commenced the present action, to license the Schreiner patent to IH at a royalty rate of approximately 1%.

While agreeing with IH that Deere had failed to establish lost profits, the district court held there was no established royalty in the case. Specifically, the court concluded that the White license was "irrelevant" to determining either an established royalty or a reasonable royalty, and, in fact, was inadmissible under Rule 408, Federal Rules of Evidence. 2 The offers by Deere to license IH were similarly characterized as not relevant, and, in any case, inadmissible under Rule 408.

Having thus rejected IH's proffered evidence concerning Deere's licensing and offers to license the Schreiner patent, the district court stated that:

In determining a reasonable royalty, such factors as increased profitability, market share, cost savings, and collateral benefits from the sales of related products are to be considered. In addition, the reasonable royalty allowed should take into consideration that which would be accepted by a prudent licensee who wished to obtain a license but was not so compelled, and by a prudent patentee who wished to grant a license but was not so compelled. The "negotiations" of such theoretical parties should not be viewed, however, as taking place in a vacuum. Each party would weigh the expected benefits against the expected costs of entering into a license agreement, and all known existing economic factors would be considered by them and would enter into their respective decision-making processes.

The court expressly found "no significant help on the problem here in other licenses between other parties involving other patents in the farm equipment industry, or in the assertion that 'almost invariably' past license agreements between Deere and IH had included a ceiling or paid-up amount." Rather, the district court emphasized that:

Corn being by far the largest crop in the United States, corn heads made possible * * *

the harvesting of corn with a combine and thus created a vast additional market for combines. To be a viable supplier of combines, it is absolutely essential for an agricultural equipment manufacturer to have desirable corn heads to go with them, because the corn crop is harvested primarily by combines fitted with corn heads. In IH's case, some 70% of its combines are sold with corn heads, and if unable to supply acceptable corn heads, IH's combine production would have to be reduced by about 60%. Because the profit realized from combine sales is about three times that derived from corn head sales, there is a powerful economic incentive to protect combine sales.

* * *

At the time infringement began, Deere was making, and stood to make in the future, a profit of over 35% of net selling price on each corn head it sold; but it was running into plant capacity problems which could limit its production. So, as a prudent patent holder, Deere should have desired to license a substantial manufacturer at a percentage royalty, which would be something less than 35% of the licensee's sale price but would maximize Deere profits.

Foreseeing the dismal future of [IH's own, noninfringing] corn head and the bright future of the infringing 800 Series, * * * as a prudent licensee, IH should have been willing to pay a very substantial percentage of net sales royalty, even exceeding its expected profit on corn heads, to protect its combine sales and profits.

In view of the foregoing, the district court found that, "[u]nder all the circumstances of this case, fifteen percent of net sales is the reasonable royalty rate, at or above which the damage award is mandated by the statute (35 U.S.C. Sec. 284). Anything less would be unreasonable." The district court concluded, however, that "[u]nder the law of this case, and generally in this [the Seventh] Circuit, there is no 'exceptional circumstance' justification for prejudgment interest, or for any further adjustment for inflation." (citations omitted)

Arguments on Appeal

IH's challenge to the findings and conclusions of the district court proceeds along two basic fronts. First, IH argues that the royalty rate of 15% of net sales is excessive in light of the proffered evidence of Deere's actual licensing behavior and is otherwise not supported by the record. More specifically, IH contends that the district court erred by "refusing to consider" the White license and the two offers by Deere to license IH as "the most relevant evidence" or an established royalty (or, alternatively, a reasonable royalty) in the neighborhood of 1%, rather than 15%. According to IH, the district court erroneously excluded the evidence of Deere's licensing practices, and compounded that error by preventing discovery directed to the amount for which Deere would have been willing to license the Schreiner patent.

As the second ground for its appeal, IH argues that the district court improperly based its award of a reasonable royalty on the premise of hypothetical negotiations during which the "willing licensor" engaged in conduct which, in fact, would have constituted patent misuse and a violation of antitrust law. In particular, IH alleges that "the district court...

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