Hanson v. Alpine Valley Ski Area, Inc.

• Decision Date: 06 October 1983
• Docket Number: No. 83-586,83-586
• Citation: 219 USPQ 679,718 F.2d 1075
• Parties: Alden W. HANSON, Appellee, v. ALPINE VALLEY SKI AREA, INC., Appellant. Appeal
• Court: U.S. Court of Appeals — Federal Circuit

Page 1075

718 F.2d 1075

219 U.S.P.Q. 679

Alden W. HANSON, Appellee, v. ALPINE VALLEY SKI AREA, INC., Appellant.

Appeal No. 83-586.

United States Court of Appeals Federal Circuit.

Oct. 6, 1983.

John F. Flannery, Chicago, Ill., appellant. With him on the brief was Julius Tabin, Chicago, Ill.

Arthur M. Lieberman, New York City, for appellee. With him on the brief was Keith D. Nowak, New York City, Bernd W. Sandt, Midland, Mich., of counsel.

Before MARKEY, Chief Judge, and FRIEDMAN, DAVIS, NICHOLS, and BENNETT, Circuit Judges.

FRIEDMAN, Circuit Judge.

This is an appeal from a judgment of the United States District Court for the Eastern District of Michigan adopting the report of the United States Magistrate determining the damages in a patent infringement case. We affirm.

I.

The patent involved in this case was issued to the appellee Hanson in 1961. It covers a method and apparatus for making snow used in winter sports. Prior to Hanson's invention, snow was made by mixing water and compressed air, and ejecting the combination under high pressure from a nozzle. The water froze and, by combining with water in the air, produced snow crystals. This method required a considerable amount of energy to compress the air, and the nozzles frequently froze.

Hanson's patent disclosed a new method of making snow. As the magistrate explained, rather than relying on compressed air,

[t]he Hanson process discharges water into a hub mounted in the center of a spinning propeller. The water is then fragmented into droplets by the propeller blades generating spontaneous ice nuclei.... The efficiency of the [Hanson] snowmaking system [as opposed to the prior art method] is based upon the turbulence of the air created by the airstream which increased cooling capacity.

The magistrate found that "the airless snowmaking method of the Hanson patent is at least five to seven times as energy efficient as the prior art compressed air method...."

In 1969, Hanson licensed his patent to Snow Machines International, which subsequently assigned the license to Snow Machines Incorporated (both referred to as "SMI"), for a royalty of 2 1/2 percent of sales and 2 1/2 percent of the stock of SMI. Since 1969, about 1,500 SMI machines have been manufactured and sold, and SMI paid total royalties of approximately $26,000. The magistrate found that "[w]ithin the short span of twelve years, the airless snowmaking process has developed substantially and presently accounts for almost one half of all artificially produced snow." The Hanson patent expired in 1978.

Hanson filed the present suit in February 1973. He alleged that appellant Alpine Valley Ski Area, Inc. ("Alpine") had infringed his patent through the use of three snow-making machines manufactured by Hedco, Inc. Hedco defended the suit for Alpine.

After a trial without a jury, the district court held that the Hanson patent was valid, that Alpine had infringed the patent by its use of the Hedco machines, and that Hanson was entitled to an accounting for damages. The court found that Alpine "has used the Hedco H-2d, Mark II and Mark III machines to produce snow" (finding 54). The court of appeals affirmed the determinations of validity and infringement. Hanson v. Alpine Valley Ski Area, 611 F.2d 156, 204 USPQ 803 (6th Cir.1979).

The district court referred the issue of damages to the United States Magistrate as a special master. After a trial, the magistrate recommended that Hanson be awarded damages of $12,250 for the infringement. In its review of the magistrate's report, the district court "considered the objections and arguments of counsel, and independently examined the legal basis for the Magistrate's conclusions and recommendation[s]." The court concluded that "the Magistrate correctly decided this matter" and adopted the magistrate's report as the opinion of the court.

The magistrate found that Alpine had used the three Hedco machines to produce snow and that Alpine had operated one of the machines during the 1972-73 and 1973-74 seasons and the two other machines during one season. He held that the evidence did not provide any basis for determining either the profits Alpine made or the profits Hanson lost through the infringement, and that damages therefore had to be determined on the basis of a reasonable royalty for the patent. In making that determination, the magistrate applied the "willing licensee-willing licensor rule. That is, at what royalty rate would a licensee accept a license and a licensor grant a license if both parties genuinely wish to execute a license in an arm's length transaction."

The magistrate accepted the testimony of Hanson's witness, Sidney Alpert, whom he characterized as "a highly regarded expert in the field of negotiating patent licenses," that "the royalty rate and licenses granted under the Hanson patent must be uniform." The magistrate stated that "[p]erhaps, if Defendant had proffered its own expert in licensing and negotiating patents to refute the testimony elicited from Plaintiff's expert, the Court would not be so inclined to accept these elements impelling a uniform license," but that "[o]n the record before this Court the credible testimony of Plaintiff's expert stands as the sole guidance germane to the question of licensing distinctions for manufacturers and users. The Court is limited to consideration of the record presented and as such Defendant's analysis falls."

Applying the pertinent factors for determining a reasonable royalty set forth in Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp. 1116, 166 USPQ 235 (S.D.N.Y.1970), modified and aff'd sub nom., Georgia-Pacific Corp. v. United States Plywood-Champion Papers, 446 F.2d 295, 170 USPQ 369 (2d Cir.1971), cert. denied, 404 U.S. 870, 92 S.Ct. 105, 30 L.Ed.2d 114 (1971), the magistrate concluded that

the reasonable royalty in this case must be based upon a portion of the annual cost savings attributable to use of the Hanson patent. Expert testimony on this record indicates that one-third of the cost savings would be deemed acceptable to both parties in an arm's length license negotiation. Furthermore, based upon energy costs at the time of infringement in 1972-73, the airless snowmaking method of the Hanson patent generates a dollar savings of $75.00 per gallon (of water used to make snow) per minute. That is, under the Hanson method, the cost of producing snow using one gallon of water for one minute is $75.00 less than the cost of producing snow under the compressed air method using one gallon of water for one minute. Thus the cost savings for the Hanson method is a function of any machine's capacity to make snow.

The magistrate concluded that a reasonable royalty would be one-third of the $75 savings per gallon of water that the Hanson method produced over the earlier compressed air method. Multiplying the $25 per gallon by the snowmaking capacity of the three Hedco machines Alpine used and the four years of use involved, the magistrate determined that Hanson was entitled to royalties of $3,000, $1,750, and $7,500 for each of the Hedco machines used, or a total of $12,250.

II.

The award of damages for patent infringement is governed by 35 U.S.C. Sec. 284 (1976), which provides:

Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.

* * *

* * *

The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances.

There are two methods by which damages may be calculated under this statute. If the record permits the determination of actual damages, namely, the profits the patentee lost from the infringement, that determination accurately measures the patentee's loss. If actual damages cannot be ascertained, then a reasonable royalty must be determined. Panduit Corp. v. Stahlin Bros. Fibre Works, 575 F.2d 1152, 1157, 197 USPQ 726, 736 (6th Cir.1978).

The reasonable royalty may be based upon an established royalty, if there is one, or if not upon a hypothetical royalty resulting from arm's length negotiations between a willing licensor and a willing licensee. As the Court of Claims stated with respect to the statute applicable to determining damages in infringement suits against the United States (28 U.S.C. Sec. 1498 (1976)): "Where an established royalty rate for the patented inventions is shown to exist, the rate will usually be adopted as the best measure of reasonable and entire compensation." Tektronix, Inc. v. United States, 213 Ct.Cl. 257, 552 F.2d 343, 347, 193 USPQ 385, 390 (1977), cert. denied, 439 U.S. 1048, 99 S.Ct. 724, 58 L.Ed.2d 707 (1978).

A. The magistrate held that

[t]he proofs offered in the case at hand do not suggest any basis for establishing profits experienced by the infringing Defendant in the use of the process patent nor do they establish a loss of income or loss of profit suffered by the patentee on any tangible basis by virtue of the nature of the interest the patentee has.

We have no basis for rejecting that factual determination.

B. The magistrate also ruled that the record did not show an established royalty. Alpine argues that Hanson's license to SMI at a 2 1/2 percent royalty shows an established royalty. In rejecting this contention, the magistrate correctly pointed out that under the license SMI

paid Hanson 2.5% of the selling price and a 2.5% interest in a predecessor corporation SMI a New York corporation. Thus in granting this license Hanson speculated on the value of his interest in SMI as a corporate entity. The worth of that investment and the extent to which it enhanced the royalty is unknown. Such speculation hampers a finding of an established royalty....

Moreover, as the magistrate stated, "a single licensing...