Hughes Aircraft Co. v. U.S.

• Decision Date: 19 June 1996
• Docket Number: 95-5001,Nos. 94-5149,s. 94-5149
• Citation: 86 F.3d 1566,39 USPQ2d 1065
• Parties: HUGHES AIRCRAFT COMPANY, Plaintiff-Appellant, v. The UNITED STATES, Defendant/Cross-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1566

86 F.3d 1566

39 U.S.P.Q.2d 1065

HUGHES AIRCRAFT COMPANY, Plaintiff-Appellant, v. The UNITED STATES, Defendant/Cross-Appellant.

Nos. 94-5149, 95-5001.

United States Court of Appeals Federal Circuit.

June 19, 1996.

Kenneth W. Starr, Kirkland & Ellis, Washington, D.C., argued for plaintiff-appellant. With him on the briefs were Philip C. Swain and Jay I. Alexander, Washington, D.C., and William A. Streff, Jr., Chicago, Illinois. Of counsel were Victor, G. Savikis, Jones, Day, Reavis & Pogue, Los Angeles, California, and John J. Higgins and Wanda K. Denson-Low, Hughes Aircraft Company, Los Angeles, California.

Thomas J. Byrnes, Assistant Director, Commercial Litigation Branch, Civil Division, Department of Justice, Washington, D.C., argued for defendant/cross-appellant. With him on the brief were Frank W. Hunger, Assistant Attorney General, Vito J. DiPietro, Director, William C. Bergmann, Janice M. Mueller, Edward H. Rice, and Paul F. McCaul, Attorney, Manhattan Beach, California. Of counsel was B. Frederick Buchan, Jr., Attorney, Department of Justice.

Before ARCHER, Chief Judge, NIES, Senior Circuit Judge, ^* and BRYSON, Circuit Judge.

Opinion for the court filed by Chief Judge ARCHER. Concurring opinion filed by Circuit Judge BRYSON. Dissenting opinion filed by Senior Circuit Judge NIES.

ARCHER, Chief Judge.

Hughes Aircraft Company (Hughes) appeals the judgment of the United States Court of Federal Claims awarding Hughes compensation based on a 1% royalty rate with respect to spacecraft manufactured and used by or for the United States which embody the invention of Hughes' United States Patent No. 3,758,051 (the Williams patent). Hughes Aircraft Co. v. United States, 31 Fed. Cl. 481, 35 USPQ2d 1243 (1994) (Hughes XII ). ¹ Hughes argues that the 1% royalty rate is too low. The United States cross-appeals contending that certain spacecraft were incorrectly included in the royalty base and that the interest rates used to calculate Hughes' delay damages were too high. We affirm.

BACKGROUND

A. The Williams patent relates to an apparatus for controlling the orientation of the spin axis of spin-stabilized space vehicles such as satellites positioned in orbit around the earth. The patent was issued to Donald Williams on September 11, 1973. To correct orbital deviations, the Williams apparatus applies a reactive force to the satellite by firing a jet so as to "precess," or tip, the satellite into the proper position. Although this technique was known in the prior art, ² the Williams apparatus was the first to maintain its spin axis with reference to a fixed external coordinate system. Hughes Aircraft Co. v. United States, 717 F.2d 1351, 1360, 219 USPQ 473, 479 (Fed.Cir.1983) (Hughes VII ).

The present suit began in 1973 when Hughes brought a claim under 28 U.S.C. § 1498 against the United States for just compensation stemming from the use and manufacture by or for the government of spacecraft embodying the invention claimed in the Williams patent. During the course of the protracted litigation that followed, it was determined by the Court of Federal Claims that Hughes is entitled to just compensation with respect to 81 spacecraft. Hughes Aircraft Co. v. United States, 29 Fed. Cl. 197, 243-48, 29 USPQ2d 1974, 2010 (1993) (Hughes X ). The court arrived at the final list of 81 spacecraft based in part on the 1983 decision of this court that certain accused spacecraft that use the "store and execute" method for controlling the precession jet infringe the claims of the Williams patent under the doctrine of equivalents. Hughes VII, 717 F.2d at 1366, 219 USPQ at 484. The Court of Federal Claims then found the value of the compensation base for calculating Hughes' award to be $3.577 billion, which was arrived at by using "total spacecraft cost," i.e., the total procurement cost, including payload costs, to the government of the 81 spacecraft. Hughes Aircraft Co. v. United States, 31 Fed. Cl. 464, 468 n. 5, 477 (1994) (Hughes XI ).

In Hughes XII, the Court of Federal Claims considered only the calculation of the amount of Hughes' award. The court first determined what royalty rate to apply to the compensation base to provide Hughes a reasonable royalty for the government's use of the patented invention. The court then considered the amount of pre-judgment interest (sometimes called "delay damages"), which together with the reasonable royalty would provide "reasonable and entire compensation." Hughes XII, 31 Fed.Cl. at 483, 35 USPQ2d at 1251. Because an established royalty rate did not exist for licensing the Williams patent, the court determined the royalty rate using the "willing buyer/willing seller" rule. Id. at 484, 35 USPQ2d at 1245. Under this rule, a reasonable royalty is set at the rate that the court determines a "willing licensor and licensee would bargain for at hypothetical negotiations on the date infringement started." State Indus. v. Mor-Flo Indus., 883 F.2d 1573, 1580, 12 USPQ2d 1026, 1031 (Fed.Cir.1989).

The court's royalty rate analysis focused initially on three letters containing acceptable license terms that Hughes had sent to other aerospace companies during the period from 1974 to 1978, none of which resulted in a licensing agreement. The first was a July 1974 letter from Hughes to the Philco-Ford Corporation (Philco-Ford) offering to license the Williams patent and the McLean patent together for 5%, or separately for 3%, of "the sales price of the satellite calculated at the time it is delivered to the launch pad." Hughes XII, 31 Fed. Cl. at 486, 35 USPQ2d at 1246. Although Hughes' letter was sent while a suit was pending against Philco-Ford in which Hughes accused Philco-Ford of infringing the Williams patent, the court found nothing in the letter to suggest that the offer was part of a proposed settlement of the litigation and found that the letter was sent by Hughes merely in response to earlier requests by Philco-Ford for terms at which any licenses had been offered to parties unrelated to the suit. Id. at 486, 35 USPQ2d at 1247.

The second letter relied on by the court was sent by Hughes to TRW, Inc. (TRW) in September of 1974 and offered a license at the identical rate described in the letter to Philco-Ford. Id. at 486, 35 USPQ2d at 1247. The court noted that there had never been any litigation or threat of litigation between Hughes and TRW relating to the Williams patent. Id. at 486, 35 USPQ2d at 1247. With regard to the TRW and Philco-Ford letters, the court found it significant that the anticipated royalty base underlying those offers was smaller than the royalty base in this case. Id. at 487, 35 USPQ2d at 1247.

The third letter was sent by Hughes to Messerschmitt-Bolkow-Blohm (MBB), a German corporation, as part of a series of letters regarding settlement of claims by Hughes against MBB. Id. at 487, 35 USPQ2d at 1247. As such, the court recognized that this letter could not fairly be considered an ordinary proposal of licensing terms. Id. at 487, 35 USPQ2d at 1247. The court instead relied on language in the letter in which Hughes stated that its "normal royalty rate" for licensing the Williams and McLean patents together was 5% of the "full contact price" for a commercial spacecraft or 2% of the "full contract price" for a scientific or experimental spacecraft, with the provision that the cost of scientific or experimental spacecraft did not include the cost of scientific or experimental payloads provided to MBB by others. Id. at 487, 35 USPQ2d at 1247. The court found that all of the 81 spacecraft in the royalty base were "scientific or experimental vehicles." Id. at 487, 35 USPQ2d at 1247. As Hughes had done in its Ford-Philco and TRW letters, the court reduced the 2% rate quoted in the MBB letter for both the Williams and McLean patents by a factor of 40% to arrive at a 1.2% rate for licensing only the Williams patent for scientific or experimental vehicles. Id. at 487, 35 USPQ2d at 1247.

Based on the three offers, the Court of Federal Claims reasoned that negotiations would start at a rate of something less than 1.2% and that the negotiated rates would not fall below the 1% rate the government conceded would result in just compensation. Id. at 488, 35 USPQ2d at 1248. According to the court, the royalty rate would "quickly settle on one percent." Id. at 488, 35 USPQ2d at 1248. As additional support for the 1% royalty rate, the court pointed to the large size of the royalty base in this case. The court said that "[i]t is axiomatic that the larger the potential compensation base to which a royalty rate will be applied, the lower will be the rate." Id. at 488, 35 USPQ2d at 1248-49. The court also noted that Williams was not a "pioneer" invention, that the license taken by the government was non-exclusive and unaccompanied by know-how, that the Hughes license offers to the aerospace companies were not accepted, and that Hughes had an incentive to discourage the development of alternative technology and encourage the use of the Williams invention. Id. at 488-89, 35 USPQ2d at 1249-50. As to this last factor the court found that alternatives to the Williams invention existed in 1973 or were soon after developed. Id. at 489-90, 35 USPQ2d at 1250. Based on all of these factors, the court determined that a royalty rate of 1% would be reasonable.

The Court of Federal Claims next considered the appropriate interest rate to use in calculating the delay damages to be awarded Hughes because royalties were not currently paid. The court viewed delay damages as necessary to place Hughes in the position that it would have been had the royalties been paid timely and invested in a prudent and reasonable manner. Id. at 492, 35 USPQ2d at 1251-52. For the period from September 11, 1973 to February 1, 1980, the court used rates which it viewed as required by or adopted in prior decisions for the years in question, citing Tektronix, Inc. v. United States, 213 Ct.Cl. 257, 552 F.2d...