Arachnid, Inc. v. Merit Industries, Inc.

Decision Date29 July 1991
Docket NumberNos. 90-1456,90-1461,s. 90-1456
Citation939 F.2d 1574,19 USPQ2d 1513
PartiesARACHNID, INC., Plaintiff/Cross-Appellant, v. MERIT INDUSTRIES, INC., Defendant/Appellant.
CourtU.S. Court of Appeals — Federal Circuit

Michael T. Hannafan, Michael T. Hannafan & Associates, Ltd., Chicago, Ill., argued, for plaintiff/cross-appellant.

William T. Hangley, Hangley Connolly Epstein Chicco Foxman & Ewing, Philadelphia, Pa., argued, for defendant/appellant. With him on the brief, was Gary A. Rosen. Also on the brief was Leslie L. Kasten, Jr., Panitch Schwarze Jacobs & Nadel, Philadelphia, Pa., of counsel.

Before NIES, Chief Judge, and RICH and MICHEL, Circuit Judges.

RICH, Circuit Judge.

Merit Industries, Inc. (Merit) appeals from the final judgment entered against it on March 20, 1990 (as amended July 2, 1990) by the United States District Court for the Eastern District of Pennsylvania in Civil Action No. 86-1307, assessing money damages for infringement of United States Patent No. 4,516,781 ('781 patent), titled "Dart Game with Two Microcomputers," assigned to Arachnid, Inc. (Arachnid). Arachnid cross-appeals from the district court's refusal to submit the issue of damages based on lost profits to the jury. Because we reverse the judgment of patent infringement, we do not reach the cross-appeal.

BACKGROUND

At issue here is the standing of a plaintiff to recover money damages for patent infringement occurring at a time when the plaintiff had a claim of ownership to the patented invention, but did not possess legal title to the patent. The pertinent facts are these: Arachnid, an electronic dart game manufacturer, entered into an agreement with Industrial Design Electronic Associates (IDEA) (not a party here) in 1980, whereby IDEA was to provide consulting services for improvement of the computerized scoring system of Arachnid's dart games. The Arachnid/IDEA consulting agreement provided, inter alia, that

[a]ny inventions conceived by IDEA or its employees ... in the course of the project covered by this agreement, shall be the property of CLIENT [Arachnid], and all rights thereto will be assigned by IDEA ... to CLIENT.

(Emphasis added).

Several months after the consulting agreement was terminated, IDEA engineers, on November 17, 1982, filed the application for the '781 patent. 1 Notably, the inventors (IDEA's president Donald DeVale and two other employees) assigned the '781 patent to IDEA, not to Arachnid. The assignment to IDEA, executed November 5, 1982, was recorded in the Patent and Trademark Office (PTO) and the patent was, accordingly, issued to IDEA on May 14, 1985.

In April, 1983, Arachnid amended an existing complaint it had previously filed in the Northern District of Illinois against IDEA for infringement of United States Patent No. 4,057,251 ('251 patent) (not involved here) to include two additional counts: breach of the 1980 consulting agreement, and unjust enrichment in connection with IDEA's use of the dual microprocessor device of the '781 patent. Arachnid sought, inter alia, "an assignment of all rights, title, and interest, both legal and equitable" in the application from which the '781 patent later issued. For reasons not entirely clear from the record, the breach of contract and unjust enrichment counts relating to the '781 patent were severed and not tried until April, 1987.

IDEA filed a Chapter 11 bankruptcy petition in February, 1986. IDEA's assets, including the '781 patent, were purchased in December, 1986 by Kidde Recreation Products, Inc. (Kidde), not a party here. Assignment of the '781 patent from IDEA to Kidde was recorded in the PTO.

In April, 1987, a jury in the Arachnid-IDEA litigation (which had by that time been transferred from Illinois to the Western District of Wisconsin, Crabb, J. presiding) found that the invention of the '781 patent had been conceived while IDEA was under contract to Arachnid. In accordance with the jury's verdict, on April 27, 1987, Judge Crabb ordered Kidde (who had been joined as a party) to assign its rights in the '781 patent to Arachnid. Judge Crabb's order included the statement that

plaintiff Arachnid, Inc. is hereby declared and decreed to have been and to be the lawful owner of all right, title, and interest in and to the invention [of the '781 patent]....

(Emphasis added). Kidde appealed the order to assign to this court, which affirmed with an unpublished opinion. Arachnid, Inc. v. Indus. Design Elec. Assoc., Inc., 837 F.2d 1097 (Fed.Cir.1987) (table). In October, 1987, Kidde executed an assignment of "all of its right, title, and interest in and to" the '781 patent to Arachnid. The assignment did not include any assignment of the right to recover for past infringement, nor did it make any reference to the right.

Meanwhile, on May 6, 1985, IDEA had granted a nonexclusive license to Merit to practice the invention of the '781 patent. Beginning in December, 1985 and ending in June, 1986, Merit manufactured and sold several hundred games utilizing the dual-microprocessor feature disclosed and claimed in the '781 patent. Admittedly, the claims of the '781 patent read on the games sold by Merit, and on this basis Arachnid now seeks to recover damages for infringement from Merit.

In March, 1986, the present lawsuit was brought by Arachnid against Merit in the Eastern District of Pennsylvania. Count one alleged infringement by Merit of the '251 patent. Count two alleged infringement by Merit of the '781 patent, then still owned of record by IDEA, which Arachnid described as "its rightful property" under the 1980 consulting agreement. Arachnid's prayer for relief sought, inter alia, "an award of damages together with interest to compensate ARACHNID for MERIT's infringement...."

In response to a motion for partial dismissal by Merit on the ground that Arachnid had failed to state a claim upon which relief could be granted because Arachnid was not the owner of the '781 patent, Arachnid voluntarily dismissed the '781 infringement count without prejudice to later reinstatement.

It was not until June, 1989 that Arachnid amended its complaint in the Pennsylvania action to reinstate the count alleging Merit's infringement of the '781 patent. Arachnid again sought to recover "an award of damages" based on Merit's sales of the dual-microprocessor games in the 1985-86 period.

Before the Pennsylvania district court in a jury trial, Merit continued to dispute Arachnid's standing to sue it for infringement that had occurred in 1985-86, prior to Arachnid obtaining record title to the '781 patent. Alternatively, Merit argued that even if Arachnid had standing to sue for past infringement, Merit was protected from any liability by its license under the ' 781 patent from IDEA. Both parties moved for a directed verdict on the issue of infringement of the '781 patent.

The Pennsylvania district court granted Arachnid's motion, directing a verdict of infringement by Merit, and denied Merit's motion. No written opinion was issued by the district court, but remarks during trial indicate that the court rejected Merit's lack-of-standing and license defenses. The district court also prohibited Merit from raising the defense of bona fide purchaser for value without notice (BFP); the court apparently concluded that the BFP defense could not apply because IDEA, who had licensed Merit, "never had title" to begin with.

Having directed the jury to find infringement by Merit of the '781 patent, the district court submitted special interrogatories to the jury on the issue of damages based on a reasonable royalty and willfulness. The jury found that Merit had sold 600 infringing games, that a reasonable royalty was $100 per game, and that Merit's infringement was not willful. After adding pre-judgment interest, the Pennsylvania district court awarded Arachnid approximately $88,000. This appeal and cross-appeal followed.

OPINION

Broadly phrased, the issue before us is whether the Pennsylvania district court erred in directing the verdict of infringement of the '781 patent (and in so doing, denying Merit's motion for a directed verdict). The pivotal question, of course, is Arachnid's standing, or lack thereof, to seek recovery for that infringement. Absent any written opinion but in light of the transcript of proceedings below, we construe the grant of the directed verdict for Arachnid as based upon a conclusion by the district court that Arachnid had standing to seek recovery of money damages based upon Merit's 1985-86 sales.

Our review of the district court's grant of the directed verdict for Arachnid is plenary. The district court was correct in directing the verdict only if, "under the governing law, there can be but one reasonable conclusion as to the verdict." Anderson v. Liberty Lobby, Inc., 477 U.S 242, 250, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986).

Relying on Crown Die & Tool Co. v. Nye Tool & Mach. Works, 261 U.S. 24, 43 S.Ct. 254, 67 L.Ed. 516 (1923) and similar authority, Merit's position is that Arachnid did not have "legal title" 2 to the '781 patent during 1985-86, when Merit sold the dual-microprocessor games, and absent such legal title had no standing to recover from anyone money damages for infringement occurring during that period. Prior to October, 1987 (when Kidde assigned the '781 patent to Arachnid per court order), Merit contends that Arachnid had at most only "equitable title" 3 to the '781 patent, and that such equitable title is insufficient to confer standing to sue for money damages for infringement under the federal patent laws.

Arachnid counters that, as the Wisconsin district court decreed, Arachnid "has always been" the owner of the invention of the '781 patent, and on that basis had standing to sue Merit for the infringement occurring in 1985-86. Arachnid contends that IDEA never had any interest in the '781 patent, "legal" or otherwise, because IDEA parted...

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