Reactive Metals and Alloys Corp. v. ESM, Inc.

• Decision Date: 09 August 1985
• Docket Number: No. 84-1122,84-1122
• Citation: 769 F.2d 1578,226 USPQ 821
• Parties: REACTIVE METALS AND ALLOYS CORPORATION, Appellant, v. ESM, INCORPORATED, Appellee. Appeal
• Court: U.S. Court of Appeals — Federal Circuit

Page 1578

769 F.2d 1578

226 U.S.P.Q. 821

REACTIVE METALS AND ALLOYS CORPORATION, Appellant, v. ESM, INCORPORATED, Appellee.

Appeal No. 84-1122.

United States Court of Appeals, Federal Circuit.

Aug. 9, 1985.

Lynn J. Alstadt (argued), Buell, Blenko, Ziesenheim & Beck, Pittsburgh, for appellant. With him on brief was Eugene F. Buell.

E.J. Welsh (argued), Parmelee, Miller, Welsh & Kratz, P.C., Pittsburgh, for appellee. With him on brief was William G. Kratz, Jr.

Before SMITH, Circuit Judge, NICHOLS, Senior Circuit Judge, and NIES, Circuit Judge.

NIES, Circuit Judge.

Reactive Metals and Alloys Corp., plaintiff in a patent infringement suit, appeals from a judgment of the United States District Court for the Western District of Pennsylvania, awarding attorney fees to the defendant, ESM, Inc., under 35 U.S.C. Sec. 285 and costs under Fed.R.Civ.P. 54(d). We affirm the award of costs and reverse the award of attorney's fees.

I. Background

On December 18, 1980, appellant Reactive commenced a suit against ESM for infringement of its U.S. Patent No. 4,142,887 ('887). The date of filing of the application for the '887 patent, February 21, 1978, is significant to this decision. The inventor named in the patent is Leon Luyckx who was Vice President of Marketing and Sales for Reactive until November 1, 1979. ESM counterclaimed for determinations of invalidity and non-infringement. At the time of the filing of the suit at the end of 1980, Luyckx had been working for ESM as a consultant for approximately a year and has remained in its employ throughout the litigation.

The invention of '887 relates to compositions and methods for desulfurizing molten steel. At the time Luyckx developed the patented product, Reactive was selling a line of desulfurizing products under the trademark DEOXSULF. Various products in the line were distinguished by a number. The new products, that is, the products within the claims of the '887 patent, were designated DEOXSULF 3, 3A, 15, 30 and 35. Other mixtures sold under the DEOXSULF mark did not fall within the claims of the patent.

Upon preparation of the application, Luyckx signed what was then the standard inventor's declaration which stated that the invention had not been in public use or on sale in the United States more than one year prior to its filing date. ¹ The central issue in the case, which developed during discovery, was whether the products had been "on sale" within the meaning of 35 U.S.C. Sec. 102(b) before February 21, 1977. If so, the Luyckx filing was too late under the statute to secure a patent. ² Reactive's President Joseph R. Jackman, in answering ESM's interrogatories on July 29, 1981, averred, in substance, that no products within the scope of the patent had been "offered for sale" before the critical date and that there was no record of use of DEOXSULF 3. He did state, however, that DEOXSULF 3A had been used on a trial basis as early as March 8, 1976. The specific answers will be discussed in more detail below. In response to a request for production of documents, on August 12, 1981, Reactive gave ESM a summary of sales, entitled "Deoxsulf Shipments," made to customers beginning as early as March 8, 1976 through February 1978, which showed 16 shipments of DEOXSULF 3, 3A, 30 and 35 totalling 100,000+ lbs. to third parties prior to the critical date but which were designated on the summary as for "trial" use. ³ Reactive asserts "trial" meant that the shipments were for experimental or testing purposes. Jackman's deposition was taken on August 25, 1981, by ESM, apparently without inquiry into Jackman's answers as compared to the sales summary.

After the close of discovery and the submission of pre-trial statements by the parties, trial was set to begin on November 15, 1982. On November 12, 1982, at ESM's request, the court held a conference with the parties to consider newly discovered evidence which counsel for ESM had obtained the week before from Luyckx. The evidence consisted of two 1976 advertisements for DEOXSULF 3 in a trade journal. The court postponed the trial and reopened discovery to permit Reactive to depose Luyckx. At the deposition on November 17, 1982, Luyckx produced a folder of documents which he had taken with him when he left the employ of Reactive and in which he had found the advertisements. Following the Luyckx deposition, which substantiated that the advertisements had appeared prior to the critical date, Reactive undertook to terminate the litigation, working out a settlement with ESM which resolved all issues except ESM's claim for costs and attorney fees. The parties presented to the court the following findings of fact and order of dismissal which were accepted and entered by the court on December 20, 1982:

FINDINGS OF FACT AND ORDER OF DISMISSAL

1. An offer for sale of Deoxsulf 3 appears in the September 1976 and November 1976 issues of "I & SM" magazine.

2. Deoxsulf 3 is at least within the scope of the Claims 1, 2 and 6 of United States Patent No. 4,142,887.

3. The November 1976 advertisement describes the method of Claim 8 of United States Patent No. 4,142,887.

4. United States Patent No. 4,142,887 issued on March 6, 1979 to Leon Luyckx from application, Serial No. 879,610 filed February 21, 1978.

IT IS HEREBY ORDERED THAT:

1. The above-captioned action, including all claims and counterclaims asserted are hereby dismissed with prejudice subject only to the additional terms of this ORDER.

2. Claims 1 thru 8 of United States Patent 4,142,887 are invalid under 35 U.S.C. Secs. 102 and 103.

3. Either party may file a petition for reasonable costs and attorney fees within ten (10) days.

In accordance with the above Order, ESM filed a petition for costs and attorney fees asserting that (1) Reactive made "false and misleading answers during discovery concerning whether or not the patented subject matter was 'on sale' "; and (2) Reactive "knew or should have known of the 'on sale' bar." In connection with this request, ESM's counsel sought to obtain Reactive's sales records relating to the shipments of Deoxsulf 3, 3A, 30 and 35 prior to February 21, 1977. After considering objections by Reactive, the court issued a Memorandum Opinion and Order on August 15, 1983, stating that the evidence then of record, including Luyckx's documented testimony, did not support a prima facie case of fraud on the Patent Office during prosecution. However, the court believed it appropriate in view of the established invalidity of the patent, to allow discovery to determine whether the patentee could not reasonably have believed in the validity of the patent so as to justify the prosecution of the case. The court opined that proof of sales might establish the "exceptional circumstances" required by Sec. 285 for an award of attorney fees. Thus, ESM was given the opportunity to explore Reactive's sales activities during the period in question.

Through additional discovery seeking "all documents used in preparing the attached chart entitled 'Deoxsulf Shipments,' previously provided by plaintiff on August 12, 1981," ESM obtained the invoices evidencing the sales to third party steel companies together with memoranda discussing testing of the product at various steel mills. Defendant then filed a Supplemental Memorandum in support of its petition for costs and attorney's fees submitting therewith documents which ESM obtained during the most recent discovery period, the most significant of which to the court were the invoices.

On March 22, 1984, the district court issued an Opinion and Order granting ESM an award of attorney fees and costs, stating therein: "As noted above, this court previously held that (as of December 20, 1982) the evidence did not establish that this case was exceptional so as to permit the award of attorneys' fees." However, the court held that the invoices showed that the subject transactions were "of the 'extent, character and duration' which would have barred the issuance of Patent '887 had this been revealed to the Patent Office." Thus, the activities, per the court, constituted barring "sales" not experimental "trials." The court further held that Reactive failed to respond truthfully in stating, in answer to ESM's interrogatory, that there was no record of any use of DEOXSULF 3 since there were sales records for that product. That answer also estopped Reactive from claiming that the sales were for experimental use only. Finally, the court found support for its position on the invoices from the advertisements which did not indicate the "trial" status of DEOXSULF 3.

In view of the above, the district court concluded:

This Court finds that Reactive's failure to respond truthfully to Interrogatory No. 1.01(1)(i) propounded by ESM was an act of bad faith and considers this to be the type of misconduct contemplated by 35 U.S.C. Sec. 285 and the Palmer Court. The sales records later produced unquestionably contradicted the sworn statement made by Reactive's president. This conduct makes this an "exceptional" case and warrants the award of reasonable attorneys fees. ⁵

On appeal, Reactive argues that it was error for the court to reopen discovery following settlement and that the court violated Reactive's constitutional right to a trial by jury. Further, it argues that the record, even supplemented with the invoices, does not support the award of attorney fees under 35 U.S.C. Sec. 285. It challenges the award of costs as inequitable asserting that it was ESM's own lack of diligence in failing to consult with Luyckx at an early date that prolonged the litigation.

ESM counters these arguments, and asserts, in essence, that the invoices produced during the last discovery provide the necessary support in the record for a finding of "bad faith."

II. Issue

The issues in this appeal are the propriety of the awards of attorney fees and costs to ESM.

Our jurisdiction over the appeal is found in 28 U.S.C. Sec. 1295(a)(1), the...