State Industries, Inc. v. Mor-Flo Industries, Inc.
| Decision Date | 31 August 1989 |
| Docket Number | MOR-FLO,89-1033,Nos. 89-1032,s. 89-1032 |
| Citation | 12 USPQ2d 1026,883 F.2d 1573 |
| Parties | STATE INDUSTRIES, INC., Plaintiff/Cross-Appellant, v.INDUSTRIES, INC. and American Appliance Mfg. Corp., Defendants-Appellants. |
| Court | U.S. Court of Appeals — Federal Circuit |
Paul R. Puerner, Fuller, Puerner & Hohenfeldt, S.C., Milwaukee, Wis., argued for plaintiff/cross-appellant. With him on the brief was Daniel D. Ryan. Also on the brief was Gary Shockley, Baker, Worthington, Crossley, Stansberry & Woolf, Johnson City, Tenn., of counsel.
Charles W. Bradley, Davis Hoxie Faithful & Hapgood, New York City, argued for defendants-appellants. With him on the brief was Peter H. Priest. Also on the brief was Ronald I. Weiss, Cleveland, Ohio, of counsel.
Before MARKEY, Chief Judge, MAYER and MICHEL, Circuit Judges.
Mor-Flo Industries, Inc. and its subsidiary, American Appliance Manufacturing Corporation (Mor-Flo), infringed State Industries, Inc's. (State) Patent No. 4,447,377, covering a method of insulating water heaters with foam. State Indus. v. Mor-Flo Indus., 639 F.Supp. 937, 231 USPQ 241 (E.D. Tenn.1986), aff'd, 818 F.2d 875 (Fed.Cir.1987). After the damages trial, the district court awarded State lost profits on approximately 40% of Mor-Flo's infringing sales and a royalty of 3% on the remaining 60%. It concluded that Mor-Flo's infringement was not willful and denied enhanced damages and attorney's fees. 8 USPQ2d 1971 (E.D. Tenn.1988). We affirm the judgment insofar as it awards lost profits and a 3% royalty, but vacate and remand for a redetermination of the judgment that the infringement was not willful.
The '377 patent claims a method of insulating the tank of a water heater by using polyurethane foam. The method includes wrapping the tank with a plastic sheet shaped as an envelope, installing a surrounding jacket and cover, pouring foam through an opening in the cover into the envelope, and then plugging the opening. The method contains the liquid foam while it rises and prevents it from invading areas, such as the electrical components and combustion chamber, which must be kept free of foam. State also has another patent, U.S. Patent No. 4,527,543, not contested here, that claims water heaters using the '377 envelope construction.
Mor-Flo's method found to be infringing used a cylindrical piece of plastic that was pulled over the top of the tank with fiberglass positioned around the combustion chamber at the bottom of the tank. The "sleeve" was taped below the top of the fiberglass. A jacket was then installed over the tank and sleeve, a top was installed, and foam was shot into the sleeve through an opening in the top. 639 F.Supp. at 947, 231 USPQ at 248.
In the liability trial, Mor-Flo maintained that the sleeve was not an "envelope" or " 'wrapped' around the tank" as required by the '377 patent. The sleeve, however, was identical to an embodiment shown in the patent (partial envelope), and was merely secured differently at the bottom of the tank. The illustrated embodiment also revealed a pull-over structure similar to Mor-Flo's sleeve. The district court found that it was especially damaging to Mor-Flo that it did not conceive of its "strikingly similar" sleeve method until after purchasing and disassembling a State foam-insulated water heater. Therefore, the court held that Mor-Flo's method literally infringed the '377. The district court alternatively held that it infringed the patent under the doctrine of equivalents. Id. at 950, 231 USPQ at 251.
The water heater industry is intensely competitive and marked by small profit margins. The invention is pertinent to all water heaters, but the infringement at issue here is restricted to residential gas water heaters, in particular those deemed "energy efficient" by the American Society of Heating, Refrigeration and Air Conditioning Engineers. Foam provides greater insulating capacity than the other alternative, fiberglass; therefore, foam-insulated heaters have cost advantages in terms of material, packaging and freight. The greater insulating capacity enables foam-insulated heaters to meet the energy code requirements imposed by many states by using less space than fiberglass-insulated heaters. The density of foam also strengthens the outer jacket of the water heater and makes it more resistant to denting.
In deciding the damages question, the district court faced three issues: lost profits, reasonable royalty and willful infringement. Infringement occurred between May 8, 1984, when the patent issued, and June 9, 1986, when Mor-Flo switched to the noninfringing method of fiberglass foam stops, which eliminates need for the envelope taught by the patent in suit yet keeps foam from invading the combustion chamber. State produced evidence of lost sales, and took the position that it should recover lost profits for its market share of Mor-Flo's infringing sales and a reasonable royalty for the remainder. It also asked increased damages for willful infringement and attorney fees.
The district court agreed with State in the award of lost profits for part of its damages and a royalty for the rest. The court found there was a growing demand for foam-insulated water heaters, the '377 patent was the first method developed to meet this demand, and there were no other methods available during the pertinent period that were either noninfringing or acceptable as substitutes. Specifically, the court found 8 USPQ2d at 1974.
A.O. Smith Corporation, the only clearly noninfringing competitor used the less preferable fiberglass insulation. Hoyt also sold only fiberglass-insulated heaters until 1985 when it added a foam-insulated heater to its inventory. The court found that fiberglass was not an acceptable substitute for foam because of foam's advantages in reducing the size of water heaters, increasing resistance to denting, and meeting governmental energy standards.
The court also found that State was capable of producing during the relevant period, and had sales and distribution capacity to ship and sell, sufficient foam-insulated water heaters to exploit its market share of Mor-Flo's sales. Finding that State has approximately 40% of the gas water heater market nationwide, the court awarded State the profits it lost on 40% of the sales of 754,181 infringing Mor-Flo water heaters.
For the remaining 60% of Mor-Flo's sales, State asked for a royalty of 8 to 10%. Mor-Flo presented no evidence of what it would have paid for a license, but argued that in no event should the royalty rate be above its net profit margin which, for the seventeen months preceding the date infringement began, was 2.1%. The district court awarded a royalty of 3% on the remaining 60% of infringing sales. Finally, the court concluded the infringement was not willful because Mor-Flo relied in good faith on advice of outside counsel that its process was not infringing.
Mor-Flo appeals both the award of actual damages and the reasonableness of the royalty. State cross-appeals the reasonableness of the royalty and the court's failure to hold Mor-Flo's infringement willful and to award increased damages and attorney's fees.
Deciding how much to award as damages is not an exact science, and the methodology of assessing and computing damages is committed to the sound discretion of the district court. King Instrument Corp. v. Otari Corp., 767 F.2d 853, 863, 226 USPQ 402, 409 (Fed.Cir.1985). A challenger must show that "the district court abused its discretion by basing its award on clearly erroneous factual findings, legal error, or a manifest error of judgment." DataScope Corp. v. SMEC, Inc., 879 F.2d 820, 823-24, 11 USPQ2d 1321, 1323 (Fed.Cir.1989) (quoting Nickson Indus. v. Rol Mfg. Co., 847 F.2d 795, 798, 6 USPQ2d 1878, 1879 (Fed.Cir.1988)).
The measure of damages is an amount which will compensate the patent owner for the pecuniary loss sustained because of the infringement. 35 U.S.C. Sec. 284 (1982); see also General Motors Corp. v. Devex Corp., 461 U.S. 648, 654-55, 103 S.Ct. 2058, 2061-62, 76 L.Ed.2d 211, 217 USPQ 1185, 1188 (1983); Del Mar Avionics, Inc. v. Quinton Instrument Co., 836 F.2d 1320, 1326, 5 USPQ2d 1255, 1260 (Fed.Cir.1987). But the floor for a damage award is no less than a reasonable royalty, Seattle Box Co. v. Industrial Crating & Packing Inc., 756 F.2d 1574, 1581, 225 USPQ 357, 363 (Fed.Cir.1985), and the award may be split between lost profits as actual damages to the extent they are proven and a reasonable royalty for the remainder. See TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 898, 229 USPQ 525, 526 (Fed.Cir.1986).
To get lost profits as actual damages, the patent owner must demonstrate that there was a reasonable probability that, but for the infringement, it would have made the infringer's sales. Water Technologies Corp. v. Calco Ltd., 850 F.2d 660, 671, 7 USPQ2d 1097, 1106 (Fed.Cir.1988); Del Mar, 836 F.2d at 1326, 5 USPQ2d at 1260; see also Bio-Rad Laboratories v. Nicolet Instrument Corp., 739 F.2d 604, 616, 222 USPQ 654, 664 (Fed.Cir.1984) (). But "[t]he patent holder does not need to negate all possibilities that a purchaser might have bought a different product or might have foregone the purchase altogether." Paper Converting Mach. Co. v. Magna-Graphics Corp., 745 F.2d 11, 21, 223 USPQ 591,...
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