Milgo Electronic Corp. v. United Business Communications, Inc.

Decision Date29 May 1980
Docket NumberNo. 78-1624,78-1624
Citation623 F.2d 645,206 U.S.P.Q. 481
PartiesMILGO ELECTRONIC CORPORATION, a Florida Corporation, Plaintiff-Appellee, v. UNITED BUSINESS COMMUNICATIONS, INC., a Kansas Corporation, Defendant- Appellant.
CourtU.S. Court of Appeals — Tenth Circuit

Stanley R. Jones, Tustin, Cal. (Harold L. Jackson, Tustin, Cal., with him on the brief), of Jackson, Jones & Price, Tustin, Cal. (J. Donald Lysaught of Weeks, Thomas, Lysaught, Bingham & Mustain, Overland Park, Kan., with him on the brief), for plaintiff-appellee.

William H. Curtis, Kansas City, Mo. (Michael C. Manning, Kansas City, Mo., with him on the brief), of Morrison, Hecker, Curtis, Kuder & Parrish, Kansas City, Mo., Carter H. Kokjer of Lowe, Kokjer, Kircher, Wharton & Bowman, Kansas City, Mo. (John F. Dodd, Shawnee Mission, Kan., and Robert D. Benham of McAnany, Van Cleave & Phillips, Kansas City, Kan., with them on the brief), for defendant-appellant.

Before BARRETT, DOYLE and LOGAN, Circuit Judges.


United Business Communications, Inc. (UBC) appeals from an adverse judgment in a patent infringement action initiated by Milgo Electronics Corporation (Milgo). Bifurcated trials to the Court on the issues of liability and damages were held in September 1975 and December 1977, respectively, after which the Court found, inter alia, that: Each of the Milgo patents in question were valid; certain claims of each patent were infringed by the manufacture, use and sale of the accused modems; Rixon II was a mere instrumentality, alter ego, or agency of UBC; the infringement was flagrant and willful; and Milgo was entitled to a total judgment, including taxable costs, of $2,340,726.23.

Concurrent with its judgment upholding the validity of the Milgo patents and awarding damages, the Court rendered detailed findings of fact and conclusions of law encompassing in excess of one hundred pages of the record on appeal. We will therefore limit our development of the factual background to those issues we deem dispositive on appeal, i. e., the validity of the patents in question, the existence of an agency relationship between UBC and Rixon II; and the damages awarded.

I. Patent Validity

Milgo is a Florida corporation engaged in the manufacture and sale of data communication equipment, including "modems", which are used to implement communication of binary data over telephone lines. It is not possible to transmit digital information by applying it directly to the telephone lines; accordingly, modems were developed for converting digital information from its original form to a form in which it can be carried on telephone lines. Simply stated, a modem is a telephone made specifically for a computer or an information terminal to communicate with another computer or terminal over an ordinary telephone line. Modems convert output signals from a computer or terminal into electric signals suitable for transmission through a telephone line; and convert the received signal back into an information signal receivable and understood by a computer or terminal. This process of signal conversion is called mod ulation (sending) and dem odulation (receiving) and the word modem is a contraction of mod ulator-dem odulator.

Computers operate on a number system in which all numbers are represented by an array of "1's" and "0's", known as the binary numbering system. In systems for the transmission of data, the speed of transmission is usually defined in "bits" ("1" or "0") per second or "bps".

Telephone lines designed for voice communication have a bandwidth of approximately 300 to 3000 Hertz (Hz). 1 Such lines are classified as either "switched or dial up lines" or "leased lines". Switched or dial up lines utilize multiple pairs of lines and diverse electronic equipment which are switched together in a random, first available basis to form a complete circuit each time a telephone call is placed. Leased lines, on the other hand, are not switched randomly with every call and such lines can therefore be specially treated or conditioned to make them more readily adaptable for data transmission. Leased lines are graded as Types 4, 4-A, 4-B, and 4-C and the cost of such lines increase in that order. Switched or dial up lines are more difficult to utilize for data transmission than leased lines, and the less expensive leased lines, e. g. Types 4 and 4-A are more difficult to utilize than the very expensive, highly conditioned Type 4-C leased lines.

By the early 1960's high speed computers had surpassed the ability of the available modems to transmit data over ordinary switched telephone lines. Typical available modems used a two or four level modulation technique to represent data on the carrier. Proponents of the two level modulation technique felt it was preferable over the four level because the error rate was believed to be directly related to the number of levels. It was also believed that if the bandwidth of the signal was narrowed, the data rate had to be reduced accordingly. The four level modulation technique, on the other hand, required a wide energy spectrum, from 600 to 3000 Hz, which was considered "necessary to permit the recovery of a clock signal and provide a high signal to noise ratio". As such, the four level modulation technique incorporating a wide energy spectrum required the utilization of expensive, highly conditioned leased lines.

In the late 1950's and early 1960's, after its own research and development group could not produce an adequate modem for the new computers, Western Union began looking for a modem which would allow its customers to connect their high speed computers to its newly constructed broadband exchange (BEX) which operated much like its switched telephone network.

Western Union specifically sought a modem which would operate satisfactorily at 2400 bps using less than a 1000 Hz bandwidth, since it had concluded that such a modem would work within its BEX network. Western Union's own personnel, however, were skeptical that such a modem could be developed, inasmuch as it was generally believed that the utilization of a narrow band, such as 1000 Hz, would decrease the signal to noise ratio and that the error rate would be substantially increased.

In early 1965 Sang Whang, and several other Milgo employees, took part of Milgo's missile tracking system that handled data as a stand-alone modem and met with Western Union's personnel. Western Union, however, believed Milgo's modem was entirely inadequate, and it reiterated what it considered to be a workable modem for its BEX network.

Upon his return to Milgo, Whang proceeded to develop a modem capable of functioning within the prescribed limitation of Western Union's BEX network. In so doing, Whang developed a modem which, for 2400 bps operation, utilized eight level modulation within a narrow bandwidth centered at 1700 Hz. Whang's prototype modem created considerable interest at Western Union:

Q. What was the substance of that phone call? A. Well, the phone call was to Mr. Boughtwood and he came out of his office laughing, as I recall. He had gotten a phone call from Sang Whang, I believe, of Milgo, and Sang had informed him that unfortunately they could not build a modem that used a thousand cycles of bandwidth and he was very sorry about that, Mr. Whang was, but however would we be amenable to coming and looking at one that used eight hundred cycles of bandwidth, and it tickled us considerably but that was the first contact through any of this. I think it took us about twenty minutes to get our airline tickets.

Q. I take it you were interested in seeing an eight hundred cycle bandwidth modem?

A. We were not believers at that moment.

Q. You didn't believe they had done that?

A. No.

Q. Did Sang Whang do it?

A. He sure did.

Q. Would you set forth those key features that it highlighted? A. Okay. By far the most unique feature to us at that point in time was the narrow bandwidth that it required to operate. The second one was the compression technique used to get that narrow band. It was essentially the eight-phase modulation, because this was the first time that we had ever seen or heard of anybody making a practical version of an eight-phase modem. Four phases was considered the state of the art at that point in time.

Q. What do you mean by state of the art? A. The state of the art is pushing the art. It's the latest version, it's the latest technology, the latest technique, and we had gone through a development phase spearheaded by the Bell System to get to the four-phase modem and they had developed that and refined it and that was considered the state of the art in 1965 and this was a breakthrough, both in the narrow band and in the fact that they were using eight phases.

Q. And you figured the Milgo modem was a breakthrough at that point? A. To us it certainly represented a breakthrough at that point in time, yes. It satisfied a real need that we had, satisfied all our requirements.

(R. Appdx., Vol. I at pp. 282-284).

Whang subsequently was issued a patent for his modem, U.S. Patent No. 3,524,023 (Whang '023). The Whang '023 patent disclosed and claimed a high speed data modem system intended to operate over ordinary unconditioned switched telephone lines which would function in ordinary lines without a variable equalizer. The patent asserted that the elimination of the equalizer was achieved by limiting the bandwidth of the data transmission channel to substantially less than the 300-3000 Hz bandwidth available in the line; that a composite band limiting filter restricted the band in the modem to a width of less than 1000 Hz for a 2400 bps data rate, and that the band is centered on a frequency of around 1700 Hz with a low side of 1200 Hz and a high side of 2200 Hz. The patent asserts that the band binding of the signal to the narrow band of less than 1000 Hz resulted from Whang's discovery that within this bandwidth,...

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