Appendix — Milgo Electronic Corp. v. Codex Corp.

Supreme Court brief1984

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Text

Office - Supreme Court. S

8: FILED

“I- WSO, FEB 6 1984

No. - ALEXANDER L. STEV4S

meeCTERK

In the

Supreme Court of the United States

Octoser Term. 1983

MILGO ELECTRONIC CORPORATION, ET AL..

PETITIONERS.

CODEX CORPORATION, ET AL..

RESPONDENTS.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

Marcus E. Conn. P.C.

Corne ius J. MoyniHan, Jr.. P.C.*

Peasopy & Brown

One Boston Place

Boston. Massachusetts 02108

(617) 723-8700

Attorneys for the Petitioners

* Attorney of Record

Blanchard Pres. Inc.. Boston. Maw — Law Printers

Appendix I

TABLE OF CONTENTS

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B-1

APPENDIX B

Unrrep States District Court

FOR THE DISTRICT OF KANSAS

Milgo Electronics Corp.

United Telecommunications, Inc., et al.

No. KC-3380 Decided Jan. 13, 1976

Action by Milgo Electronics Corp. against United Telecom-

munications, Inc. and United Business Communications, Inc.

for patent infringement. Judgment for plaintiff in part.

Stanley R. Jones, Harold L. Jackson, and Jackson & Jones

Law Corporation, all of Tustin, Calif., and J. Donald

Lysaught, Overland Park, Kans., for plaintiff.

Carter H. Kokjer, Lowe, Kokjer, Kircher, Wharton &

Bowman, William Curtis, and Morrison, Hecker, Curtis,

Kuder & Parrish, all of Kansas City, Mo., and Robert D.

Benham, Kansas City, Kans., for defendants.

Templar, District Judge.

Findings of Fact and Conclusions of Law

Statement

This action was commenced on July 19, 1971, when plain-

tiff filed its original complaint (Doc. 1 ), alleging that it was

brought under provisions of 35 U.S.C. §271 for infringement

of its patent No. 3,524,023. Thereafter, and on September 25,

1972, plaintiff filed an amended complaint (Doc. 68), alleging

infringement of the above patent and in addition, infringe-

ment of patents numbered 3,590,381 and 3,643,023. Relief

sought by plaintiff is to determine liability of defendants for

patent infringement and for costs, expenses, attorney fees and

treble damages. The last item claimed because, as plaintiff

contends, defendants willfully and wantonly infringed the

plaintiff's described patents.

B-2

It is plaintiff's position that the three patents referred to

cover inventions made by it or its assignors relating to new and

novel data modem concepts. According to plaintiff, a modem

is a telephone made specifically for a computer or an informa-

tion terminal to communicate with another computer or ter-

minal via an “ordinary” telephone line, i.e., a telephone line

used for human voice communication. A standard telephone

converts voice sound into an electric signal which is transmit-

ted through the telephone wire and is converted back into

sound at a receiving location to be heard by the ear of a

listener. A modem, or data telephone, converts an output

signal from a computer or a terminal into an electrical signal

suitable for transmission through a telephone line, and at the

other end it converts the received signal back to an informa-

tion signal of proper type to be understood by the computer or

the terminal. The process of signal conversion and reconver-

sion is called modulation and demodulation, and the word

modem is a contraction (acronym) of “modulator-

demodulator.”

As used in connection with a modem, data is described as in-

formation, particularly that used as a basis for computer pro-

cessing. For the purpose of discussion in conjunction with data

transmission by a modem, data is a long string of two level

(binary) signals which represents letters of the alphabet or

numbers that are to be transmitted from one location to

another remote location.

The record discloses that patent No. 3,524,023 is referred to

as “Whang ‘023”"; patent No. 3,642,023 is referred to as

“Payne “023”; and patent No. 3,590,381 is referred to as

“Ragsdale ‘381.”

Summarizing plaintiff's contentions, it appears that one

Rixon Electronics Corporation (Rixon I) was a competitor in

the modem industry in 1968. that “Rixon modems” did not

compete successfully with plaintiffs Milgo 4400 modem

series,” and after failing in several attempts to produce a com-

B-3

petitive modem, Rixon, referred in the record as Rixon I, pro-

cured a Milgo modem and slavishly copied the circuits used

therein and thereafter utilized this information, thus ac-

quired, in constructing, manufacturing and distributing on

the market a modem labeled DS-4800 (PM-48A). Thereafter,

in the fall of 1968, defendant United Telecommunications,

Inc., (United) agreed to acquire Rixon I and its assets, and in

the summer of 1969, all the assets of Rixon were transferred to

Rixon Electronics, Inc., a new corporate entity, referred to as

Rixon II. Thereafter, United formed another corporation, a

wholly-owned subsidiary, known as United Business Com-

munications, Inc. (UBC). The stock of Rixon II was then

transferred from United to UBC and in July, 1970, the

marketing activities of Rixon II and the sales of its products,

including the modems referred to as DS-4800 and DS-2400

series data sets, were transferred to UBC. Then in August.

1970, plaintiff's basic patent, the Whang ‘023 was issued.

Plaintiff asserts that this patent was reviewed by defendants

and personnel reported that the DS-4800 infringed plaintiff's

patents, but UBC continued to manufacture and sell the

DS-4800 and DS-2400 modems with the knowledge and ap-

proval of United. This, plaintiff claims, continued from July,

1970 to August, 1972.

Plaintiff contends that United’s liability for infringement

arises from the fact that United completely dominated and

controlled the operations of both Rixon II and UBC. In addi-

tion, plaintiff contends that United is liable for infringement

because it entered into a joint venture agreement with

Sangamo Electric Company, Inc. (Sangamo), under the terms

of which agreement United agreed to sell and transfer the infr-

inging data sets to a new joint venture entity in which it would

and did participate.

B-4

Defendants’ Corporate Arrangements

The response of defendants to plaintiff's claims requires an

analysis of the somewhat complicated developments in the

corporate arrangements conducted by United and its sub-

sidiaries, as well as the other legal and factual defenses raised

by both defendants. In connection with this phase of the case,

the defendants contend that:

United is a corporation organized and existing under the

laws of the State of Kansas. Prior to June 2, 1972, United

operated under the name of United Utilities, Incorporated.

United is and has at all times since November 15, 1938, been a

holding company rather than an operating company and has

at no time had operating divisions. Until December, 1971,

United was qualified to do business only in the State of Kansas.

Since that time it has also been qualified in Pennsylvania for

limited purposes.

United, as a holding company, owns the stock of a number

of companies called the United Telephone System, as well as

all or part of the stock of certain manufacturing, supply and

service companies. It also has as other subsidiaries an electric,

gas and water company, a computer time sharing company

and a leasing company.

On or about October 24, 1968, an agreement in principle

was entered into between Rixon Electronics, Inc., a Maryland

corporation (hereinafter “Rixon I”), and United, con-

templating the acquisition by a subsidiary to be formed by

United of the business and assets of Rixon I in exchange for

United stock. This was followed by an Agreement and Plan of

Reorganization dated December 12, 1968, between United

and Rixon I, whereby United agreed to issue to Rixon I shares

of United's common stock in exchange for the conveyance by

Rixon I of all of Rixon I's business and assets, less certain cash

and marketable securities retained hy Rixon I to satisfy ex-

penses incidental to the contemplated transaction, to a newly

organized wholly-owned subsidiary of United.

B-5

On May 23, 1969, United caused to be organized a Mary-

land corporation named New Rixelco. Inc. (hereinafter Rixon

II) as a wholly-owned subsidiary. On July 3, 1969, United

issued to Rixon I 597,105 shares of its common stock, and Rix-

on I transferred and conveyed to New Rixelco. Inc. (Rixon II)

all of its business and assets (including, without limitation, its

patents and permits), except certain cash and marketable

securities retained by Rixon I to satisfy expenses incidental to

the contemplated transaction, and New Rixelco, Inc. (Rixon

II) assumed all of the liabilities and obligations of Rixon I then

existing, except Rixon I's expenses relating to the transaction

and certain outstanding stock options of Rixon I under its

employees stock option plans, which options were assumed by

United.

Subsequent to July 3, 1969, the name of Rixon I was chan-

ged to Rixon Liquidating Company, and the name of New

Rixelco, Inc. (Rixon II) was changed to Rixon Electronics, Inc.

on July 11, 1969. Rixon Liquidating Company (Rixon 1) has

continued in operation since that time as an independent com-

pany totally unrelated to United or any of its subsidiaries.

UBC was organized as a Kansas corporation on January 5,

1970. UBC was organized to enter the business of selling,

engineering, installing and servicing private voice and data

communications equipment, services and systems for sale or

lease to business users. On June 24, 1970, United transferred to

UBC all of the outstanding stock of Rixon J!, and Rixon II was

at all times thereafter a wholly-owned subsidiary of UBC.

Beginning in July, 1970, UBC undertook the marketing of cer-

tain products of Rixon LI (formerly New Rixelco, Inc.), in-

cluding the modems charged by plaintiff as infringing plain-

tiffs patents. On January 1, 1972, by agreement of the officers

of UBC and Rixon II, UBC discontinued the marketing of data

modems and Rixon II assumed responsibility for providing its

own marketing, both non-government and government. The

UBC inventory of data modems (including DS-4800 and

: ats"

B-6

DS-2400) and other products were earmarked for Rixon II,

withdrawals from the inventory and payment to UBC there-

after being made as Rixon II consummated sales to third par-

ties. UBC discontinued the marketing of data modems of the

type here involved, including specifically the DS-4800 ana

DS-2400, as of January 1, 1972, and has made no sales of such

modems since that date.

United and UBC first learned that plaintiff was claiming in-

fringement of the Whang ‘023 patent when they were served

with process in this action in July, 1971.

The infringement charge in the original complaint was

based upon the contention by Milgo that a 4800 bit per second

(bps) data modem being sold by UBC came within the scope of

one or more claims of the Whang ‘023 patent. UBC was char-

ged with infringement by reason of its sale of the data modem.

United was charged with making and selling the allegedly in-

fringing data modems.

The 4800 bps data modems sold by UBC were sold by it

under its trade designation DS-4800. The data modems were

manufactured by Rixon II. At the time of commencement of

the suit, Rixon II was a Maryland corporation and a wholly-

owned subsidiary of UBC. Neither 2ixon I nor Rixon II were

at the outset of the suit or have been since named as a party.

Neither United nor UBC ever controlled or exercised any

dominion over Rixon I (now Rixon Liquidating Company,

Inc.). either before or after Rixon I transferred its assets to Rix-

on II in July, 1969.

Between the time of the organization of Rixon II in May,

1969, and the organization of UBC on January 5, 1970, the

stock of Rixon II was wholly-owned by United. Since January

5, 1970, the stock of Rixon Il has been wholly-owned by UBC.

However, on or about October 1, 1972, pursuant to an agree-

ment dated as of September 29, 1972, by and between

Sangamo Electric Company, United, Rixon 11, and UBC, Rix-

on II conveyed substantially all of its assets and business to a

j -

~ Pee a a3

B-7

newly formed corporation, Rixon. Inc., a Delaware corpora-

tion (hereinafter Rixon III). Rixon III] was formed and has

since operated as a subsidiary of Sangamo Electric Company,

which owns 60% of the equity and has the option to purchase

United's 40% interest under certain conditions. Since on or

about October 1, 1972 Rixon II has not engaged in the

manufacture, sale, or use of any of the alleged infringing

devices.

Validity of Patents Questioned and Infringement Denied

Defendants deny that the 4800 bps (bits per second)

modems sold by UBC under designation DS-4800 incorporated

the disclosed circuitry of the Whang ‘023 patent, the Ragsdale

‘381 patent or the Payne ‘023 patent. Defendants also deny

that the 2400 bps modems sold by UBC under designation

DS-2400 incorporated the disclosed circuitry of the Ragsdale

‘023 patent. They assert that plaintiff does not claim the

DS-2400 infringes Whang ‘023 or Ragsdale ‘381. Defendants

deny that the DS-4800 and DS-2400 modems were “slavishly

copied” from the plaintiff's Milgo 4400 series data modems nor

from any of plaintiff's patents.

Defendants contend that the issue of infringement must be

decided on comparison of the patents with the accused equip-

ment and not devices commercially offered and sold by or on

behalf of the patentee, it being defendants’ claim that none of

the claims of the Whang ‘023 patent are properly readable on

the DS-4800 modems sold by UBC or by any data transmission

systems sold by UBC. Defendants also insist that Whang ‘023 is

a “paper patent” and was not used in the Milgo 4400 allegedly

copied by Rixon. Furthermore, defendants say that the perti-

nent claims in Whang ‘023 patent are invalid and void because

the subject matter of the claims were known and publicly

disclosed in the art prior to Whang’s alleged invention of such

subject matter and the differences, if any, claimed and the

prior art as a whole would have been obvious to a person hav-

B-8

ing ordinary skill in the art, and in any event if the claims in

the Whang ‘023 patent are interpreted broadly enough to read

upon defendants’ DS-4800 sold by UBC, then these claims are

broader than any invention to which Whang might otherwise

have been entitled and are not properly based or supported by

disclosure in his application.

Defendant also claims the Whang ‘023 patent is invalid and

unenforceable by reason of being based on an inadequate

disclosure, that the claims are not made in clear, concise and

exact terms.

Defendants say that the claims of Ragsdale ‘381 patent are

not readable on DS-4800 modems sold by UBC. Also, that the

claims of Ragsdale ‘381 patent are invalid and void on the

grounds of public disclosure in prior art on the subject matter

and the differences claimed were obvious to a person having

ordinary skill in the art, and any claims made in Ragsdale ‘381

interpreted broadly enough to read upon DS-4800 are broader

than any invention to which Ragsdale might be entitled.

Again, defendants say that if the claims of Ragsdale ‘381 are so

broadly interpreted, then they are not based upon or sup-

ported by the disclosure of the application filed in the Patent

Office.

Defendants allege that UBC has not sold any DS-4800

modems which include a digital detector as represented in Rix-

on drawing 540-1112B, and none of the claims of Payne-

Ragsdale ‘023 are readable on any data transmission systems

sold by UBC. It is again alleged by defendants that the Payne

‘023 (Ragsdale, et al, ‘023) patent is invalid and void because

the subject matter of the claims had been known and publicly

disclosed in the art prior to the alleged invention, and the dif-

ferences, if any, in the subject matter as a whole would have

been obvious to a person having ordinary skill in the art at the

time and further that if the patent is interpreted broadly

enough to read upon DS-4800 data modems sold by UBC, or

any system on which modems are employed, they are broader

B-9

than any invention plaintiff might otherwise have been en-

titled to in its original application. It is also asserted that if the

claims are interpreted to include within their scope the

DS-4800 data modems of UBC, then they are broader than

and not properly based upon or supported by disclosure of the

application for the patent, and none of the claims in this

patent are readable on DS-2400 modems sold by UBC.

Defendants further contend that any of the identified claims

of Ragsdale, et al, ‘023 (Payne ‘023), if interpreted broadly

enough to read upon the DS-2400 data modems sold by UBC,

or any system in which modems are employed, they are

broader than any invention to which the Ragsdale, et al, ‘023

might otherwise have been entitled in its originally filed ap-

plication and if the claims are interpreted to include within

their scope the DS-2400 data modems of UBC, then they are

broader than and not based upon or supported by the dis-

closure of the application originally filed.

Defendants also claim that UBC discontinued selling data

modems as of January, 1972, and has not and could not have

infringed the Ragsdale, et al, ‘023 patent as that patent did not

issue until February 17, 1972.

Pretrial Procedure

A review of the file discloses that a conference was held

January 24, 1973. The Magistrate prepared a memorandum of

the conference (Doc. 84). Each party was directed to state in

writing the party's factual contentions and the issues of law

and fact. Plaintiff's statement is Document 106. The statement

of defendants is Document 109. The Magistrate made a brief

summary of the claims and contentions of the parties and

entered a pretrial order, Document 125, which reads in per-

tinent part:

B-10

“Briefly, plaintiff claims that the defendants wilfully in-

fringed three of plaintiff's patents, copies of which are at-

tached to the Amended Complaint (file document No.

68). Plaintiff claims that Rixon, the manufacturer of the

claimed infringing products, and United Business Com-

munications, Inc., are mere instrumentalities of United

Telecommunications, Inc. Defendants deny these con-

tentions, and attack the validity of the patents.

“Highly summarized, the issues are whether Rixon and

United Business Communications, Inc. are mere in-

strumentalities of United Telecommunications, Inc.;

whether the patents in suit, and the specific claims of

each, are valid; whether the various claims of plaintiff's

three patents are infringed by the manufacture and sale

of the DS-2400 and DS-4800 Data Sets; whether defen-

dants actively induced infringement of those claims;

whether the infringement was willful; and the nature

and extent of plaintiff's damages.

“The parties agree that the question of damages shall not

be tried until the other question of law and fact have been

determined. The parties do not agree upon trial of the

issues of willfulness. Defendants contend that the ques-

tion of willfulness of the alleged infringement should be

tried as a part of the damage issue, if and when that is

tried. Plaintiff contends that defendants’ acts of

deliberate and willful infringement including the copying

activities of Rixon are pertinent to the trial on the issue of

liability as well as to the award of attorneys fees.

“There is no question as to jurisdiction or venue. Trial

will be to the court at Kansas City, Kansas.

“File documents No. 106 and No. 109, being the

statements of the factual contentions and the issues ad-

vanced by the respective parties, are made a part of the

pretrial order.”

B-11

Comment

After hearing the evidence offered by the parties’ the Court

requested the parties to submit proposed findings of fact and

conclusions of law. They have complied. Likewise, well pre-

pared briefs have been filed and oral arguments were afforded

counsel.

The Court has reviewed the files, the extensive notes kept

during trial and at all subsequent proceedings. A transcript of

the evidence has been provided and numerous exhibits have

been supplied for the Court's consideration. The Court has

read the depositions received in evidence and which were not

read at trial, also the communications from counsel following

the oral arguments. In addition, the Court has studied the

material supplied by the Federal Judicial Center included in

the volume entitled “Seminars for Newly Appointed United

States District Judges,” including the “Kettering Award Ad-

dress” by Judge Giles S. Rich entitled “The Vague Concept of

Invention as Replaced by Sec. 103 of the 1952 Patent Act,” at

page 564; also, Judge Rich’s speech at page 600 of the same

volume in which he discusses “Infringement Under Section 271

of the Patent Act of 1952”; and the discussion entitled “The

Varied Meanings of ‘Invention’ in Patent Practice: Different

Meanings in Different Situations,” page 24. While I can no

longer claim to be “newly appointed,” the discussions have

been helpful in considering the legal problems involved in this

litigation. I have found the comments of Judge Howard T.

Markey, Chief Judge of the Court of Customs and Patent Ap-

peals, reported at 66 F.R.D. 529, to be very instructive as they

relate to some of the issues raised in this case.

I have also carefully read the case of Price v. Lake Supply,

510 F.2d 388, 183 USPQ 519 (10th Cir.), in which that court

in some detail considered the sufficiency of the trial court's

findings and of particular interest was the following declara-

tion at 394, 183 USPQ at 524:

B-12

“The trial court held that although the accused device

was not precisely identical, nevertheless the two devices

do the same work in substantially the same way, ac-

complishing substantially the same result.

“In McCullough this court recognized that a patent

which constitutes a marked improvement in the art is en-

titled to a substantial range of equivalents, and every ele-

ment or its functional equivalent must be found in the ac-

cused device in order to have an infringement.

“Consistent with McCullough and the other decision, we

agree with the trial court that the presence of the nuts

and bolts rather than the pivot does not result in the ac-

cused device being outside the range of equivalents. It

would seem that since the loosening of the nuts and bolts

and the removal of the strap and headers accomplishes

the same result as the pivot, the obviousness of the change

brings the accused device within the scope of the

equivalent doctrine.”

The Court further pointed out that whether there is in-

fringement and applicability of equivalents are both factual

questions.

The Tenth Circuit analyzes the Graham-John Deere case in

an opinion found in Halliburton v. Dow Chemical Co., 514

F.2d 377, 185 USPQ 769, where the court said at 379, 185

USPQ at 771:

“Graham v. John Deere Co., 383 U.S. 1, 17-18, 148

USPQ 459, 466-467, mentions three basic factual in-

quiries essential to a determination of obviousness. They

are (1) scope and content of the prior art, (2) differences

between the prior art and the claims at issue, and (3) level

of ordinary skill in the pertinent art. Each of these was

considered and, on substantial evidence, resolved against

Dow. John Deere also states three secondary considera-

tions, (1) commercial success, (2) long felt but unresolved

needs, and (3) failure of others. Dow relies se: amd

B-13

secondary considerations. The need for consideration of

secondary evidence is ‘an evidentiary question primarily

entrusted to the district court. Potter Instrument Com-

pany, Inc., 1 Cir., 499 F.2d 209, 211, 182 USPQ 386,

387-388. Lack of invention cannot be outweighed by

secondary factors. Dow Chemical Co. v. Halliburton Oil

Well Cementing Co., 324 U.S. 320, 330.”

Another Tenth Circuit case dealing with patent infringe-

ment and having some application here is Swanson v. Unarco,

479 F.2d 664, 178 USPQ 17, where at 670, 178 USPQ at 22,

Judge Pickett’s opinion in an earlier case is approved as

follows:

“Infringement is not avoided by making a machine which

differs in form but appropriates the principle and mode

of operation of the patented machine by the use of the

same or equivalent means.

* * * Infringement exists if the accused device performs

substantially the same function in substantially the same

way and accomplishes substantially the same result as the

patented device, even though they differ in name, form

and shape.

* * * If the accused machine falls clearly and definitely

within the claim of patent, infringement is made out.

McCullough Tool Co. v. Well Surveys, Inc., supra. The

protection provisions of a patent cannot be avoided by

adding materials unless a wholly different result is ob-

tained. ‘Colorable differences without substance do not

avoid infringement.’ Bewal, Inc. v. Minnesota Mining

and Mfg. Co., [10 Cir.], supra 292 F.2d 159 at 167, 129

USPQ 440 at 445-446.”

There are several fundamental rules that the Court must

consider in attempting to arrive at a just disposition of the

issues in this case which present some difficult questions of

fact, the resolution of which must be based on evidence not

easily comprehensible to one lacking the technical training of

B-14

the experts who offer the testimony on which the issues must

be settled.

[1] We begin with the proposition that a patent is presumed

to be valid and that the burden of proof is on the party asser-

ting invalidity and the burden of proof is a heavy one and in-

validity must be established by clear and convincing evidence.

35 U.S.C. §282; A. E. Staley Co. v. Harvest Brand, 452 F.2d

735. 736, 171 USPQ 795, 796.

[2] Where all elements of an invention were known in the

prior art but not utilized together, if the combination produces

unexpected results different from the prior art, an invention

may be patentable, particularly where the prior art indicates

that the procedure utilized by the patent will be unproductive.

U.S. v. Adams, 383 U.S. 39, 148 USPQ 479.

[3] In considering the validity of the separate patents, each

must be considered individually in the context of the prior art

and not in the context of the other. Under the statute, 35

U.S.C. §121, the claims of the three patents in the suit must be

considered with respect to each other in the same manner as

one considers the claims of a single patent with respect to each

other. See Illinois Tool v. Foster Grant, 395 F.Supp. 234, 256,

181 USPQ 553, 568-569.

[4] Under patent law, no doctrine is better established than

that a prior patent or publication, to be an anticipation, must

bear within its four corners adequate directions for the prac-

tice of the patented invention. The test of obviousness must be

applied in the context of the circumstances that existed when

the challenged invention was made and not in the context of

today’s technology. 35 U.S.C. §103; See 395 F.Supp. 234, 257,

181 USPQ 553, 569-570.

[5] While 35 U.S.C. §112 compels full disclosure for an in-

ventor to obtain the monopoly grant, shorthand description, if

understandable by those skilled in the art, are acceptable

under this rule of reason. Columbia Broadcasting v. Zenith

Radio, 391 F.Supp. 780, 791, 185 USPQ 662, 670-671.

B-15

[6] Disclosure of a claimed invention is performed not only

by the claims made but by the patent specifications and ac-

companying drawings, which elucidate the claims. 35 U.S.C.

§112. The test of disclosure of claimed invention is only that

one skilled in the arf*must be able to ascertain the invention

without undue experimentation. Furthermore, there is no re-

quirement that the drawings accompanying a patent be so

detailed as to be production specifications. 35 U.S.C §§112,

113; McClaren v. B-I-W Group, Inc., 401 F.Supp. 283, 293,

294, 187 USPQ 345, 353.

[7] An inventor may be his own lexicographer. The function

of the claims is to define the scope of the invention; it is not

their function to describe the embodiment. Claims are legal

definitions, not descriptions. Disclosure is further performed

by the patent specification and accompanying drawings which

may elucidate the claims of the patent. McClaren v. B-I-W

Group, supra, at 294, 187 USPQ at 351.

[8] Anticipation is a technical defense and unless all of the

same elements are found in exactly the same situation and

united in the same way to perform the identical function in a

single prior art reference, there is no anticipation. Mc-

Cullough Tool Co. v. Well Surveys, Inc., 343 F.2d 381, 145

USPQ 6.

[9] Infringement of patent is established when patent owner

demonstrates that alleged infringer has made, used, or sold a

product, process or apparatus coming within the scope of the

claimed inventions. W. R. Grace v. Park Mfg., 378 F.Supp.

976, 978, 181 USPQ 490, 492. The true test of infringement is

whether the accused device and the device covered by the pa-

tent do the same work in substantially the same way to ac-

complish substantially the same result. McCullough Tool Co.

v. Well Surveys, supra, at 401, 145 USPQ at 21-22.

[10] In a suit for patent infringement, the plaintiff has the

burden of proving its case by the preponderance of the

evidence. 69 C.J.S. Patents, §325, p. 984.

B-16

(11) A patent must be a valid one in order to support a claim

of infringement thereof, and there can be no infringement of a

patent before it is issued. 69 C.J.S. Patents, §283, p. 843;

American Bottle v. Orange Crush, 76 F.2d 969, 25 USPQ 189

(4th Cir.).

[12] While the grant of a patent creates a presumption of

validity the presumption is rebuttable. The ultimate question

of validity is one of law for the Court to decide. The burden of

establishing invalidity of a patent rests upon the party asser-

ting it and one who relies on anticipation to defeat patent-

ability must sustain that anticipation by clear and convincing

proof. Consolidated Elec. v. Midwestern, 260 F.2d 811, 119

USPQ 231 (10th Cir.).

(13] The motive or intent with which an alleged act of infr-

ingement is committed is immaterial, and a person may infr-

inge a patent without an actual knowledge of its existence. 69

C.J.S. Patents. §285, p. 844.

[14] Patent infringement is committed by one who makes,

uses or sells a patented invention without authority, or by one

who actively induces infringement. 35 U.S.C. §271;

Scaramucci v. FMC Corp., 258 F.Supp. 598. 151 USPQ 618

(Okla.).

[15] The test of infringement is whether the patented device

and accused device do the same work in substantially the same

way and accomplish substantially the same result. Impairment

of function and lessening of result, in degree only, does not

avoid infringement. Williams Iron Works v. Hughes, 109 F.2d

500, 44 USPQ 322.

[16] The claims of a patent are interpreted in the light of the

specifications, but with reference also to its file-wrapper

history. A claim in a patent must be read and interpreted with

reference to claims that have been canceled or rejected and

claims allowed cannot by construction be read to cover what

has thus been eliminated from the patent. Schriber v.

Cleveland Trust, 311 U.S. 211, 47 USPQ 345.

B-17

[17] Where a defendant shows use or disclosure by others

before the application, the burden is no longer on defendant to

establish that plaintiff was not the first inventor and the

burden shifts to the patentee to show prior invention. Thomp-

son v. American Tobacco Co., 174 F.2d 773, 81 USPQ 323;

American Lakes v. Nekoosa Co., 83 F.2d 847, 29 USPQ 551.

[18] On the question of what constitutes new matter in an

amendment to an application for patent, the opinion of the ex-

aminer is to be given great weight and an amendment made

more than one year after the invention went on sale does not

disqualify applicant where the amendment was clarifying in

its form and effect rather than new matter. Price v. Lake Sup-

ply Sales, 510 F.2d 388, 183 USPQ 519 (10th Cir.).

[19] Where evidence shows that others had tried and failed

to solve the problem presented and evidence shows that the

problem was solved — this answers an attack that the patent

was obvious. Panduit Corp. v. Burndy Corp., 378 F.Supp.

775, 180 USPQ 498.

[20] For patented subject matter to go against teaching of

prior art is indication of non-obviousness thereof. W. R. Grace

Co. v. Park Mfg. Co., 378 F.Supp. 976, 181 USPQ 490.

Defendants urge the application of the holding of the

Supreme Court in the case of Muncie Gear v. Outboard

Marine, 315 U.S. 759, 53 USPQ 1, and contend that plaintiff is

disqualified for a patent under Whang ‘023 because his inven-

tion was offered for sale and was in use in excess of one year

prior to the date of the patent application. Specifically, defen-

dants claim that the application as originally filed did not

disclose center sampling at the center of modulation periods

and the amendment filed March 29, 1968, was the first

disclosure of this claim and was more than one year after the

invention was offered for sale and used.

The Tenth Circuit has had occasion to interpret the Muncie

Gear decision. In Price v. Lake Sales Supply, supra, 183 USPQ

at 523, that court made the following pertinent observations

which this Court believes to be a correct and proper applica-

tion of Muncie Gear, at 393:

B-18

“Appellee Price made the initial application less than a

year after the invention went on sale. But the time of the

amendment was more than one year after the invention

went on sale. Appellant contends that the Muncie Gear

rule recognized, however, that where the amendment

‘only makes express what would have been regarded as

the equivalent of earlier claims or where it merely incor-

porates into one claim [that which could] be gathered

from the perusual of all, if read together, it [must] be

allowed.’ Autogiro Company of America v. United

States, 384 F.2d 391, 410, 155 USPQ 697, 712-713

(CT.C1.1967). If, on the other hand, the amendment is

something more than a clarification, Muncie Gear ap-

plies. See Monroe Auto Equip. Co. v. Heckethorn Mfg. &

Supply Co., 332 F.2d 406, 141 USPQ 549 (6th Cir. 1964),

which says ‘the question is whether there is anything in

the prior disclosures which will support the subsequent

claim, or does the claim broaden or change the original

invention. ‘Id. 332 F.2d at 417, 141 USPQ at 558.

“The trial court considered the amendment not to be in

conflict with the rule of Muncie Gear. The Examiner

reached the same conclusion. The opinion of the Ex-

aminer (and that of the court too) is to be given great

weight in determining what is ‘new matter.’ See

Technicon Instruments Corp. v. Coleman Instruments

Corp., 385 F.2d 391, 155 USPQ 369 (7th Cir. 1967). The

question is, of course, a factual evaluation. To us also the

amendment is clarifying in its form and effect rather than

new matter.”

That interpretation is applicable to the situation here.

Credibility of Witnesses

Defendants’ counsel question the competency of plaintiff's

witness Robert Ragsdale on the basis of an objection raised by

plaintiff's attorney when Ragsdale’s deposition wes being

B-19

taken by defendants in Washington D.C., on December 15,

1972. The objection was that Ragsdale was “not qualified for

comparison of claim language to products.” At that time

Ragsdale indicated that this was true. However, three years

later, as a witness, Ragsdale demonstrated substantial ability

to make physical comparison of the involved modem and data

processing equipment from a practical engineering stand-

point.

Defendants produced as an expert witness Dr. Walter R.

Beam. His credentials were impressive. He undertook to cover

every technical point raised by the defendants in their efforts

to counter and neutralize the force of the claims which had

been allowed in the patents involved. It appears that his

opinions were theoretical and based on data designed to sup-

port them rather than from a study of the appliances involved

in the litigation and their practical operation. Such effort to

support every point raised by defendants and his failure to

study and observe the operation of the patented articles and

those alleged to infringe impaired the weight of his testimony

as the Court considered it.

Findings of Fact on General Issues of Validity and Infringe-

ment of Plaintiff's Patents

1. This is an action under Title 35 U.S.C. §271 for infringe-

ment of U.S. Letters Patent Nos. 3,524,023 (PX 1); 3,643,023

(PX 2); and 3,590,381 (PX 3). The original Complaint in this

action was filed on July 19, 1971, and alleged infringement of

U.S. Patent 3,524,023. An amended Complaint, filed by leave

of court on September 25, 1972, alleges infringement of all

three of the patents in suit.

2. There are three patents involved in this suit — Patent No.

3,524,023, issued August 11, 1970, naming Sang Y. Whang as

inventor and titled “Band Limited Telephone Line Data Com-

munications System™ (hereinafter the “\\ hang ‘023 patent”):

Patent No. 3,590,381, issued June 29, 1971, naming Robert GC.

B-20

Ragsdale as inventor -and titled “Digital Differential Angle

Demodulator” (hereinafter the “Ragsdale ‘381 patent”); Pa-

tent No. 3,643,023, issued February 15, 1972 naming Robert

G. Ragsdale and Paul E. Payne as inventors and titled “Dif-

ferential Phase Modulator and Demodulator Utilizing Relative

Phase Differences at the Center of the Modulation Periods”

(hereinafter the “Payne ‘023 patent”).

3. Plaintiff, Milgo Electronic Corporation (hereinafter

“Milgo”), is a Florida corporation having its principal place of

business at 8600 N.W. 4lst Street, Miami, Florida. Milgo is

the owner of the three patents in suit and has the right to sue

for infringement thereof.

4. United Business Communications, Inc. (hereinafter

“UBC”), was organized as a Kansas corporation on January 5,

1970. UBC was organized to enter the business of selling,

engineering, installing and servicing private voice and data

communications equipment, services and systems for sale or

lease to business users and at a time pertinent to this action has

been a wholly-owned subsidiary of United Telecommunica-

tions, Inc. (hereinafter “United”’).

5. Defendant, United, is a Kansas corporation organized

and eperating under the laws of Kansas with its principal

place of business at 2330 Johnson Drive, Shawnee Mission,

Kansas. At the time of filing of this Complaint, United's name

was United Utilities, Incorporated. On or about June 2, 1972,

United changed its name to United Telecommunications, Inc.

6. Rixon Electronics I and II (hereinafter referred to as Rix-

on I until July 3, 1969, and as Rixon II after July 3, 1969 until

the fall of 1972) (R. 2175, 2225) at times pertinent to this ac-

tion were Maryland corporations having their principal place

of business at 2120 Industrial Parkway, Silver Springs,

Maryland. Neither Rixon | nor II is a party to this suit. Rixon I

did not actually manufacture the accused modems but _:-

itiated the engineering project of building a modem (R. 2211),

which project resulted initially in the PM-48 modems and later

B-21

in the DS-4800 modem. Rixon II has manufactured, sold and

serviced modems variously designated as DS-4800 and

DS-2400.

7. All three patents deal in one way or another with the

transmission of binary data (“l's” and “0's”) over telephone

lines and with the implementation of or alleged improvements

in equipment for sending and receiving the binary informa-

tion. Equipment for this purpose is generally known by the

designation “modem” (from modulator-demodulator) or,

alternatively, “data set.”

8. United, in the fall of 1968, entered into an agreement in

principle to purchase Rixon I and the assets were formally

transferred to a new United subsidiary, Rixon II on July 3,

1969. In the fall of 1972, the assets of Rixon II were sold to

Sangamo Electric Company, and defendants have stipulated

that such assets include at least one each of the modems Model

Nos. DS-4800 and DS-2400 (PX 70 and 71).

9. A modem, considered in this case, is a communication

device that allows a computer or information terminal to com-

municate with another computer or information terminal via

ordinary unconditioned voice-grade telephone lines that are

used for everyday human voice telephone communication. A

data (information) signal from a terminal is converted into an

electrical signal which is suitable for telephone line transmis-

sion and at the other end the received signal is reconverted

back to an original data (information) signal. The signal con-

version and reconversion by the modem is accomplished by

modulation and demodulation, and the word modem is a con-

traction (acronym) of modulator-demodulator (R. 91-93; R.

162-165).

10. A Glossary of Terms (PX 107) defines various technical

terms which are pertinent to this action and the definitions

thereof have been testified to by the inventors of the patents in

suit and have been agreed to (with some miner modifications)

by the defendants’ technical expert (R. 162-282; R. 1041-

B-22

1083). The definitions of the technical terms in PX 107 are

hereby adopted and incorporated, as modified (See Appendix

A), in the findings of fact hereof to the extent necessary for ex-

plaining the technical terms of these findings of fact. (PX and

DX as used herein refer to plaintiff's and defendants’ trial ex-

hibits respectively. Where the exhibits include more than one

page, the exhibit number will be followed by page number.)

11. In approximately 1964, the commercial usage of or-

dinary voice-grade telephone lines to interconnect terminals

and computer systems via modems began to increase. The in

crease was brought about in part by the introduction of the

IBM 360 computer. As computer usage increased, an expand-

ed need was developed to allow users to employ modems to

transmit data over ordinary voice-grade telephone lines bet-

ween interconnected terminals and remote computers. The

commercial-based computer system concept has stimulated

the need for modems capable of transmitting data at high

speed rates over “ordinary” voice-grade telephone lines (R.

94-97).

12. The “ordinary” telephone line which was originally

developed for human voice has a bandwidth of about 300 to

3000 Hz, which bandwidth although suitable for human voice

transmission presents numerous signal impairments to data

transmission. The modem industry employs such “ordinary”

voice-grade telephone lines for the purpose of transmitting

data. Such telephone lines come in two categories, namely

switched voice-grade telephone lines and leased voice-grade

telephone lines (R. 216-222; R. 225, 226).

13. A switched voice-grade telephone line is the telephone

line obtained when telephone calls are made using regular dial

or push button telephones. The cost for the switched voice-

grade telephone line is based on actual usage on per connec-

tion basis. Since the connection is accomplished by automatic

switches in a first available shortest path basis, the telephone

line characteristics of a switched voice-grade telephone line

B-23

may change each time a new path is established even though

the same number is reached each time a call is placed (R.

216-222).

14. Leased voice-grade telephone lines are hand selected by

telephone company engineers to make a fixed connection bet-

ween two remote points for the duration of the lease. Since a

leased voice-grade telephone is not expected to change its

characteristics during the term of the lease, it is possible to cor-

rect some of the undesirable characteristics on the leased line

to make the leased line a better line for purposes of data

transmission (R. 216-222).

15. Switched lines utilized for human voice communications

are more difficult to employ for data transmission purposes

than leased lines. In addition, the leased lines which are grad-

ed as 4-A and 4-B are of a “poorer” quality as compared to

grade 4-C which is a more expensive and more precisely condi-

tioned leased line. As such, the poorer quality leased lines of

grade 4-A and 4-B are the more difficult based lines for data

transmission purposes (R. 216-222).

16. The largest and most prominent factor in the modem in-

dustry for many years prior to the early 1960's was Western

Electric Manufacturing Company, an arm of the Bell

Telephone system. In the early 1960's, the leading indepen-

dent modem manufacturers included Rixon and Collins. Milgo

did not enter the commercial modem market until mid-1967,

when it was a newcomer in competition with the largest

dependents that included at that time Rixon Collins and

Lenkurt (R. 116-118).

17. In 1965, Western Union was in the process of com-

pleting construction of a voice and data transmission facility

which it termed its broadband exchange network, shortened

to BEX network. The BEX network had switching centers

located at various metropolitan locations throughout the

United States and was operated much like a conventional

telephone network in the sense that connections from point to

B-24

point were dialed up through the switching centers in random

paths. The network was developed primarily for data

transmission and in conjunction with this aspect of use,

Western Union was a potential customer for modems or data

sets (R. 333-340).

18. At that time there was a need for a data modem which

could satisfactorily transmit 2400 bits of data over switched

telephone lines. Prior to 1966, Western Union Telephone and

Telegraph Company had a modem of its own design which

would satisfactorily transmit 1200 bps over its switched or

BEX network but did not have any modem of its own design

which would satisfactorily transmit 2400 bps over the BEX

switched network (R. 115, 332, 333).

19. In about 1965, Western Union Telephone and

Telegraph Company discontinued further efforts to create its

own modems and initiated an evaluation of the modems then

commercially available (R. 348-351). The evaluation program

sought to locate a modem which could satisfactorily transmit

2400 bps over the Western Union BEX switched network (R.

347, 348).

20. Late in 1965 (November and December) Milgo called

upon Western Union with the thought in mind of interesting

Western Union in purchasing modems from Milgo. The par-

ticular unit that Milgo had in mind for sale at that time was a

unit which Milgo had put together from its previous ex-

perience in missile range tracking and similar endeavors. It

was a frequency shift keyed unit operating at an odd bit rate

and required a relatively wide band for operation, described

as around 1800 to 2000 Hz. Western Union was not interested

in the Milgo unit. However, during the course of meeting with

Milgo personnel (including Mr. Whang), Western Union in-

dicated that it would be interested in a modem that would

process 2400 bits per second and in which the bandwidth re-

quired for operation would be less than 1000 Hz, with the

1000 Hz band centered at 1700 to 1800 Hz (R. 365A-366;

468-469) .

B-25

21. Western Union had been challenging modem manufac-

turers to provide a modem for their BEX network which would

operate satisfactorily at 2400 bps using less than 1000 Hz of

bandwidth. Western Union had concluded that if the moder

operated within that bandwidth it could successfully transmit

2400 bps through the BEX switched network. The challenge

was contrary to the theory of the day. Western Union issued

the challenge to Sang Whang of Milgo (R. 366-367).

22. After receiving the Western Union challenge in about

November, 1965, Whang returned to Milgo (R. 318). Whang

was not at that time an experienced modem designer (R. 323),

but did have knowledge of the characteristics of telephone

lines gained by his earlier professional experience in designing

filters for operation in conjunction with telephone lines (R.

153, 154). Based on his experience with telephone lines,

Whang concluded that most telephone lines would “look”

alike and the noise factors of switched telephone lines would

not be saved if a modem employed a very narrow bandwidth

of less than 1000 cycles, provided the bandwidth was centered

about a center frequency of between 1600 and 1800 Hz

(Whang ‘023 patent, Col. 2, lines 38-43, R. 757, 767, 768, 929,

1000, and 1001).

23. In December, 1965, Whang developed a modem which,

for 2400 bps operation, employed differential eight phase

modulation of a single carrier centered at 1700 Hz and double

sideband operation. It used a narrow bandwidth which

limited the spectrum of single energy outside of the requisite

narrow bandwidth to negligible values so as to stay within the

1000 cycle or less specification and make all lines within that

bandwidth appear similar (Whang ‘023 patent, Col. 2, lines

38-43, Col. 3, lines 40-53, R. 768, 777, 779, 882, 929, 935,

937, 1000, 1001).

B-26

24. Whang built a composite filter means in his original

modem which limited the data modulated carrier signal to a

frequency range of between 800 and 1000 Hz. The combina-

tion of multi-level (eight phase) and narrow bandwidth filter-

ing in a data modem at the time of the invention of the Whang

‘023 patent was contrary to the then existing practices

employed in the modem industry (R. 235, 1010 and R.

369-372, 387, 501). Such a combination creates severe pro-

blems in recovery of data, recovery of clock for sampling, and

increases the sensitivity of the system to signal impairments

presented by telephone lines over which data is to be transmit-

ted (R. 935). At the time of his original conception, Whang

was not aware of how he would recover a clock signal required

for demodulation at the center of the modulation period in his

modem (R. 784).

25. While the original modem was being constructed,

Whang discovered that the narrow band limiting feature of

the Whang ‘023 patent in suit yielded a carrier envelope of a

unique shape at the receiver. Whang was about to obtain a

precise clocking signal from the unique shape of the carrier

envelope (R. 784-788). The original Whang modem was the

first to employ narrow band limiting in a phase modulated

system in order to obtain a carrier envelope from which a

derived clock may be obtained. The Whang clock recovery

was a new technique that was significantly different from the

standards used in modems at that time (R. 325-327: and R.

399, 402, 465).

26. As Whang’s original modem was being built, it many

times did not operate satisfactorily. His own engineers and co-

employees, who knew more about modems than Whang,

presented literature to Whang suggesting that his modem con-

cept was not technically feasible. Whang persisted in his

original modem concept, and ultimately the Whang ‘023 in-

vention was incorporated in the first commercially acceptable

modem that was capable of transmitting 2400 bps over or-

B-27

dinary switched voice-grade telephone lines. The original

Milgo modem was designated Milgo modem Model 4400/24

(R. 119; R. 322, 329; and R. 407, 408, 413, R. 329, 489).

27. In about June, 1966, Whang advised Western Union

that he had successfully designed a feasibility model of the

Milgo 4400/24 modem which would allow Western Union to

meet their customers’ requirements of 2400 bps transmission

over the BEX network (R. 329, R. 368, 369).

28. The prototype modems were examined by Western

Union and were demonstrated to Western Union personnel as

early as June, 1966 (R. 369; PX6; PX 7) and were tested prior

to November, 1966 (R. 427). Mr. Spilling testified that band-

pass filter in the transmitter was quite narrow (R. 428-429).

Also, the transitions of the clock were precisely coincidental

with the center of the modulation period, and again, accor-

ding to Mr. Spilling, this was extremely important to an eight

phase modem (R. 461; DX J-2).

29. The selection by Western Union of the particular 1000

Hz portion of the voice band in the BEX network, which it

described to Milgo, was based on analysis by Western Union of

line transmission characteristics of the BEX network. Western

Union had determined that this particular channel in the

voiceband was the most stable for data transmission in that its

characteristics were the most predictable on the average, even

though random selection of lines through switching operations

was carried out. As stated by Mr. Spilling, who testified at

trial, the 1000 Hz band, centered at 1700 to 1800 cycles, was

that part of the voiceband that appeared to look nearly alike

from one network to the other or from one connection to the

other. (R. 468-469.)

30. In November of 1966, Milgo and Western Union entered

into a contract of sale for the modems developed by Milgo, the

amount of the contract being approximately $600,000.

31. According to Western Union scientists, prior to the

Milgo 4400/24 modem, there was no commercially available

B-28

modem which would transmit 2400 bps satisfactorily over the

BEX switched network. The Milgo modem which incor-

porated the principles of the Whang invention was so contrary

to the then existing state of the art that Western Union's scien-

tists at first did not believe that the Milgo modem could

satisfactorily transmit 2400 bps over switched telephone lines

in a bandwidth of less than 1000 Hz. (R. 368, 369). According

to Western Union, the Milgo 4400/24 modem was the first

practical eight phase modem (R. 369-372).

32. Prior to the Whang ‘023 invention, the modem industry

believed that the modem that performs the best with greatest

noise tolerance margin over a good line or without a line

(back-to-back) would also perform the best over a poor line.

For that reason, most prior art modems employed wide band

energy spectrum and two or four level modulation (R. 935,

938, DX F-1; R. 2345-2354, DX G-1, DX J-1, DX I-1, DX T-1,

DX L-2, PX 29/10, PX 179).

33. The Whang ‘023 invention made a breakthrough

because Whang approached the problem with a completely

opposite philosophy. His approach was based on the theory

that a modem that would perform the best and adequately

over a lousy line would perform adequately over any line

(Whang ‘023. Col. 2, lines 38-43). Whang’s invention combin-

ed both eight level modulation and extreme band limiting into

one modem. The Whang approach represented a new and

novel conceptual theory that went against the state of the then

existing modem art (R. 369-372; R. 395).

34. The facts set forth in Finding No. 29 are borne out by

Western Union's evaluation and comparison test results shown

in pages 4, 5 and 6 of PX 10. The tests show that the Milgo

4400/24 modem exhibited poorer performance in operation

over good telephone lines than either the Bell or Lenkurt

modems. However, over narrow part of telephone lines, the

Milgo 4400/24 modem performed satisfactorily whereas

Bell and Lenkurt modems did not do so. Milgo’s 4400/24

B-29

modem performed about the same regardless of the type of cir-

cuit over which the modem was operating. (PX 10, R.

357-363; R. 374-385; R. 501.)

35. The Milgo modems Model 4400/24, purchased by

Western Union, were labeled as Western Union 2247A

modems. These Milgo modems allowed Western Union to of-

fer a reliable nationwide 2400 bps service over the BEX net-

work and thereby opened up new customers to Western

Union, and reduced operating costs (R. 389-392, 413). The

narrow bandwidth of the Milgo modem 4400/24 also allowed

Western Union to place additional information in the form of

a secondary channel on the lower end of the spectrum of or-

dinary voice-grade telephone lines (R. 447-449). In addition,

the restricted bandwidth made equalization requirements less

stringent than in the broad bandwidth prior art modems (R.

2142, 2143). The original Milgo modems 4400/24 did not re-

quire variable equalization but rather operated satisfactorily

with a statistical equalizer (R. 281). Milgo’s null meter techni-

que of equalization made equalization easy to even non-skilled

users (R. 624-625; R. 883-886).

36. Both Western Union and Milgo management were con-

vinced that the Whang ‘023 invention as incoporated in the

Milgo modem 4400/24 and the corresponding Western Union

2247A modems were major breakthroughs in the data

transmission art (R. 480-482; R. 666). It was acknowledged

that the Whang ‘023 invention filled a need which had existed

for a long time in that it allowed economical communication

between computers or terminals over inexpensive switched

voice-grade telephone lines. Defendants’ own technical expert

conceded that the principles of the Whang 4400/24 modem

were contrary to the modem practices existing in 1966 (R.

2156) and the Milgo modem 4400/24 was a great help to

Western Union and it solved a problem that Western Union

couldn't solve (R. 2145).

37. Milgo, based on the success of the 4400/24, applied the

B-30

principles of the 4400/24 (eight phase and narrow band

limiting) into a 4800 bps modem referred to as Milgo’'s

4400/48. The first Milgo 4400/48 included the type of analog

detectors used in the Milgo 4400/24. Although satisfactory in

operation, the analog detectors were causing Milgo

reproducibility problems (R. 393-396; R. 1035-1039, 1112).

38. Milgo Model 4400/48 was the first modem to successfully

transmit 4800 bps over the poor quality 4-A and 4-B leased

telephone lines (R. 119-121; R. 666). It was recognized as an

immediate commercial success. Sale of the Milgo Model 4400

series increased from about $1,000,000 in 1968 to $4,400,000

in 1969 and $5,500,000 in 1970. In 1970, the competing

DS-4800 modem was marketed by Rixon. Milgo sales of its

4400 series dropped from about $5,500,000 in 1970 to about

$2,700,000 for 1971 and 1972 (PX 18, page 2).

39. Subsequent introduction of additional modem series by

Milgo (Models 4600, 3300, 2200, 24/LS1 and 20/LSI as well as

the 4400 series embody the claimed inventions of the patents in

suit (R. 800, 823, 824; R. 1112, 1121-1131, PX 18) ). The

patented Milgo modems are today sold on a worldwide basis

(R. 715-717). In less than a decade from its entry into the

modem market, Milgo/ICC has emerged as one of the

leaders of the independent modem manufac-

turers (R. 120, 121). The growth of Milgo today is attributable

1968 to date of approximately 2% to 3% of sales (R. 606, 697).

40. Total modem sales for the modems by Milgo have risen

from about $4,000,000 in 1967 to $11,600,000 in 1972;

$14,500,000 in 1973; $16,500,000 in 1974; and approximately

$17,000,000 annualized for the Milgo fiscal year ended

B-31

in 1971; $84,000 in 1972; $181,000 in 1973; $170,000 in 1974;

and about $190,000 annualized for 1975 (R. 714-715). The

sale of modems has completely turned Milgo around from a

loss position in 1966 to a very profitable corporation today (R.

682).

41. Claim 19 of Whang ‘023 provides for a data transmission

system having a transmitting and receiving device connectable

together by a signal transmission link, said system comprising:

means for storing a group of at least these serial bits in-

putted to said transmitting device at a given data bit rate;

means at the transmitting device for generating a car-

rier signal having a given modulation period and

modulated with all of the digital bits of said group to be

transmitted over said link during said modulation period;

means at the transmitting device for applying the data

modulated signals to the signal transmission link;

means at the receiving device operative for sampling

each modulation period at substantially the center

thereof and responsive thereto for demodulating the data

modulated signals received over said link; and

filter means connected in the signal transmission link

between said modulating and demodulating means, the

filter means being characterized as having a passband

width of about 1/T Hz and having a center frequency of

fo selected between 1500 Hz and 1800 Hz, and a pass-

band substantially equal to ¥s the data bit rate; where:

T is the modulation period, fo is the carrier signal fre-

quency, and Hz is cycles per second.

42. Claim 20 is dependent on claim 19 and adds to the sub-

ject matter of claim 19 the limitations that the modulating

means is a phase differential system with the phases selected in

45° multiples, that the demodulating means includes means

for sampling the phase angle of the carrier signals during the

center portion of each modulation period, and that the system

also includes means for comparing the phase angles so as to

B-32

restore the transmitted digital data levels to the original

format.

43. Claims 2: and 22 relate to further definition of the

transmission link between the transmitting and receiving

devices. Claim 21 establishes that the filter means and the

transmission link form a composite filter network having

substantially a linear phase and constant amplitude and delay

characteristics. Claim 22 defines the transmission link to be a

randomly selected telephone line having matched characteris-

tics over a selected narrow bend width.

44. Claim 25 is similar to claim 19, but is directed specifi-

cally to phase differential modulation and is not limited to

grouping the bits in groups of three. It does, however, include

the sampling of the phase angle of the adjacent signals during

the center portion of the modulation period, and also sets forth

the filter means in the terms of having a passband width of

about 1/T Hz.

45. Claims 27, 28 and 29 are all dependent on claim 25 and

recite further limitations with respect to the filter means, par-

ticularly, with reference to where the filter is located, ie., at

the transmitter or receiver. Claims 31 and 32 are like claims 21

and 22, described above. Claims 36 and 37 are also dependent

upon claim 25 and add to claim 25 the presence of a clock

recovery circuit based on reception at the receiver of a band

limited carrier envelope and utilizing a 1/T signal component

derived from envelope to control a clock signal generator.

46. The findings require a somewhat detailed review of the

course that the application which resulted in the Whang ‘023

Patent followed during its pendency in the Patent Office and

of the commercial activities of the plaintiff during the years

1966-1967.

47. The file wrapper of the Whang ‘023 Patent is in evidence

as DX A. The claims submitted with the application as filed

are found at pages 39-48 of the file wrapper. One purpose of

band limiting was to reduce the bandwidth to a bandwidth in

B-33

which the delay and attenuating characteristics of the ran-

domly selected telephone lines were sufficiently predictable as

to do away with the need for variable equalization. The claims

as filed were not limited only to phase modulation, but in-

cluded also amplitude and frequency modulation.

48. At the end of March, 1968, before any action had been

taken by the Patent Office, and after a change in patent at-

torneys by the applicant, an amendment was filed in which all

of the claims originally submitted were canceled (DX A, pp.

63-67). Twenty-seven new claims (claims 29-55) were

substituted. These claims did define “center sampling” either

at the center of the modulation period, or during the center of

the modulation period. (DX A, pp. 64 & 68.) The word “only”

was added to this claim on page 64 of DX A, by later amend-

ment.

49. The twenty-seven claims submitted with the March,

1968 amendment were rejected by the Examiner in an Action

dated July 19, 1968 (DX A. pp. 78-82). They were rejected

both on the basis of an inadequate disclosure and on the

ground that they defined nothing patentabie over a Baker pa-

tent No. 3,128,343 (DX L-2) and an article by Irland (DX

M-2) published in October, 1958. The Baker patent was relied

upon by the Examiner to show a phase modulated data

transmission system producing phase shifts in a 1750 Hz car-

rier and in which the modulated wave is demodulated by com-

paring the incoming phase with the preceding phase, as in the

Whang arrangement. Irland was relied upon for disclosing a

filter in a data transmission system limited to 800 Hz along

with an equalizing circuit.

50. The inadequate disclosure rejection was based in part on

the fact that the pulse produced by the clock circuit for sampl-

ing the produce modulators would be 625 microseconds long,

which did not accord with a modulation period-of 1250

microseconds.

51. A further amendment was filed on October 30, 1968

Se ee ee Te

B-34

(DX A. p. 85 et seq.).. This was more than two years after the

application had been filed. In this amendment the spécifica-

tion was arnended to add to it a statement defining sampling

of the product modulators as taking place “for a short time

duration only at the middle of the modulation period.” (DX A.

p. 86.) The attorney noted in his remarks accompanying the

amendment (DX A. pp. 92-95) that:

“The specification has been amended to improve its form

and to achieve conformance with the drawings and

claims as originally filed. By separate letter to the Patent

Office Draftsman, gates 67-70 of Figure 12 have been

shown and labeled as ‘Sample and Hold’ gates. In Fig. 13

the gates 67-70, previously repeated from Fig. 12, have

been deleted. Drawing changes were suggested in the Of-

fice Action, and such changes conform the drawing to ap-

plicant’s disclosure at page 29, lines 29 and 30.

Applicant's attorney appreciates the Examiner's courtesy

in calling this and certain other discrepancies to his atten-

tion.

“An Abstract has been added. Certain clarifications in

the specification are believed to fully traverse the objec-

tions to the specification. In particular answer to certain

objections, it is noted that:

“(1) Timing recovery at the receiver, it is submitted, is

fully described at page 17, lines 2 through 19, and again

starting at line 26, page 25, and continuing through line

28, page 26. As stated, the input wave of Fig. 9(e), as a

result of applicant's narrow band limiting filter, includes

strong 800 Hz energy which is synchronized with the

modulation rate of the transmitter. After the envelope of

Fig. 9(e) is full wave rectified, it is passed through an 800

Hz center frequency narrow band filter 56 which isolates

out the 800 Hz signal. The output of filter 56 has a fre-

quency which is synchronized with the modulation rate.

Any suitably stable oscillator circuit 57 may then be syn-

B-35

chronously driven by the output signal from filter 56.

“(2) In the Office Action reference was made to the pulse

width of an 800 Hz clock. The 800 Hz clock employed at

the receiver is not a symmetrical square wave, but rather

is a narrow pulse which is repetitive at the center of each

modulation period, i.e. 800 times per second. Applicant's

severe band limiting assures phase integrity (i.e. output

like input) only at the middle third of each modulation

period. Tius. sampling is done at the middle of each

modulation period for a time period in the order of 5 to 10

microseconds. The sample is ‘held’ by gates 67-70 for ap-

proximately 1,250 microseconds.

“(3) A gate 107, in view of the above, is held on for the

sample and hold duration by an output from one of gates

104, Fig. 15. The 2400 Hz clock is passed by the enabled

gate 107 to shift out a decoded pattern from register 108.

See page 30, lines 1-19.

“(4) In the Office Action reference was made to ring

counter 23 which changes state in response to pulse from

encoder 20. Only one ‘one’ circulates in ring counter 23

and thus only one phase at a time is outputted. During a

transition and for an extremely short duration more than

one phase may be outputted in the manner noted in the

Office Action, but its effect is negligible.

“(5) The question posed as to why a fixed equalizer need

not be adjusted, may best be answered in connection

with a short summary of applicant's invention since it is

closely related to one key feature, thereof.

“Prior to the advent of this invention, it was com-

monplace to attempt equalization over a major portion of

the full spectrum of standard telephone lines, i.e. bet-

ween 1,000 and 2,600 Hz. See for example the right hand

column, middle section of page 378 in the Ireland Paper

cited in the Office Action. Although it was recognized

that the best transmission portion of a given sampling of

B-36

standard telephone lines was between 1,200 and 2,200

Hz, no one prior to applicant took advantage of this

known fact by narrowly band limiting the signals to

match this optimum portion of all standard telephone

lines. In applicant's invention the digital signals to be

transmitted are modulated on a carrier signal which is

selected at the center of the optimum transmission por-

tion of such telephone lines. The pass band of applicant's

filter is severely bandlimited to the inverse of the modula-

tion period expressed in cycles per second. By letting the

line characteristics dictate applicant's signal format, ap-

plicant’s carrier frequency may be selected in the range

from 1600 Hz to 1800 Hz provided that the bandwidth is

limited to1no more than about + 500Hz on either side of

the selected carrier frequency. Neither Baker nor Ireland,

nor any other known reference employs this novel princi-

ple as presently claimed by applicant.

“Phase modulation is particularly useful in applicant's in-

vention in either eight or four-phase formats. With an

eight-phase format the passband is limited to “% the bit

rate. Typical examples of these passbands with a center

frequency of about 1700 Hz are given in applicant's

specification for 1200 BPS, 2400 BPS and 4800 BPS

modems.

“With the foregoing in mind, it may be seen that appli-

cant has rejected signal components outside of his narrow

bandwidth. In the prior art, components outside the

bandwidth coming through at the wrong times with ir-

regular amplitudes produce a distorted signal, such as

that shown in applicant's Fig. 6. However, applicant's

filter to reject such unnecessary components introduces

its own delay distortion to the system. Such delay,

however, is simply compensated for by a fixed equalizer,

or delay correcting network. Applicant's fixed equalizer

also compensates for average delay and amplitude varia-

tions for standard telephone lines only within the narrow

bandwidth, all telephone lines now ‘look’ alike over the

narrow bandwidth in question ~

B-39

57. Another type of modem, representing the state of the

prior art, employs vestigial sideband amplitude modulation.

Such prior art includes the Rixon Sebit series as described in

Myrick (DX B-1) and the Irland reference (DX M-2) (cited by

the Patent Office in the Whang “023 patent) and the article by

Brand and Carter (DX T-1). The Sebit series are described in

an article by Hollis (DX F-1) and by the Myrick patent (DX

B-1). Hollis was then President of Rixon, and his paper

describes that a vestigial sideband two level amplitude

modulation is preferred over four phase differential modula-

tion of the type employed in the Bell modems. Hollis says that

if the bandwidth is narrowed, the data rate must be reduced.

Any technical person considering the Rixon Sebit products and

the Hollis article would conclude that it was contrary to those

teachings to develop an eight phase modem of the Whang ‘023

patent (DX F-1). Irland’s paper (DX M-2) describes a similar

vestigial sideband system operating at 1600 bps rate. For that

speed, the operation requires special line correction between

1000 and 2600 Hz (DX M-2. Col. 2 p. 378) and is thus a typical

example of adapting the line to insure the performance. The

Whang ‘023 teaching is contrary to the teaching by Irland.

The paper by Brand and Carter (DX T-1) describes another

vestigial sideband system operating at 1650 bps rate. The

paper specifies that “the requirements established for the local

line are that, over the effective band from 700 to 2600 bps, the

attenuation shall be flat within + db and the envelope delay

within + 100 ms.” Thus, a wideband system requiring special

line requirments is described (DX T-1, p. 657, right hand col-

umn). The Whang ‘023 patent in suit is awarded a presump-

tion of validity over the vestigial sideband type modem

described in the Irland paper which was considered by the Pa-

tent Office in connection with the examination and issuance of

the Whang ‘023 patent (R. 2364-2368). The claimed features

of the Whang ‘023 patent represent significant and non-

obvious improvements over the defendants’ exhibtis DX B-1.

DX M-2, DX T-1, and DX F-1.

B-40

58. The prior art Kaenel patent (DX X-2) describes the use

of amplitude modulation in addition to phase modulation.

The phase modulation carries data and the additional

amplitude modulation is employed to derive a clock signal.

Since Kaenel does not suggest narrow band limiting of the

Whang ‘023 patent. Kaenel required additional amplitude

modulation to recover the clock. Furthermore, the Kaenel pa-

tent has amplitude modulation of a frequency of 1/2T,

whereas the Whang invention as claimed has envelope varia-

tions created by the narrow band limiting of a frequency of

1/T (R. 2374). The claimed features of the Whang ‘023 patent

represent significant and non-obvious improvements over the

defendants’ exhibit DX X-2.

59. The paper by Toeffler and Buterbaugh (DX G-1)

describes a four phase modem by Hughes, the HC-270

modem. The reference does not teach the extreme band

limiting nor employment of the dependable part of the line. In

the absence of extreme band limiting, the clock derived will

lose its accuracy when operating over a poor line. The Whang

‘023 clock is derived using the energy only in a very narrow

band; therefore, it does not lose accuracy over a wide variety

of lines. The claimed features of the Whang ‘023 patent repre-

sent significant and non-obvious improvements over defen-

dants’ exhibit DX G-1.

60. The defendants introduced into evidence defendants’ J-1

which is a book entitled Data Transmission, written by

William R. Bennett and James R. Davey, heads respectively of

the Data Theory Department and Data Terminals and

Transmission Department of Bell Telephone Laboratories, In-

corporated. This defendants’ exhibit is acknowledged as a so-

called “Bible” for data communications teachings (R. 778,

779) and was characterized by defendants’ technical expert

Dr. Beam as a repertorium of data transmission techniques

listing in one spot the work, theoretical and experimental, over

a good many years of the Bell Telephone Laboratories and

B-41

others (R. 1482). Exhibit J-1 describes the modem

developments in existence in 1965 for the Bell Company and

numerous other modem manufacturs such as Collins, Rixon.

Lenkurt, Lincoln Laboratories, Hughes, Robershaw-Fulton

and others (J-1, pp. 247-251 ). Dr. Beam, referring to page 227

of J-1, originally asserted that one who had been supplied with

the Western Union criteria, would be led to a differentially

phase modulated modem grouping three bits together for eight

phase modulation and that it would be obvious to employ a

Nyquist bandwidth of 1/T Hz or about 800 cycles and that it

would also be obvious to select a carrier frequency of 1700 Hz

in order to stay within the criteria suggested by Western Union

(R. 1557-1 568). On cross-examination, Dr. Beam admitted

that he had neglected to read certain portions of pages 227 and

228 of DX J-1 which clearly teaches two different types of

modem operation which also would meet the Western Union

specifications with an even better signal-to-noise ratio than a

differentially phase modulated modem. These other modem

operations include vestigial sideband and quadrature

amplitude modulation systems, both with suppressed carrier

and colicrent detection. Thus, DX J-1 as admitted by Dr.

Beam, teaches away from the invention of the Whang ‘023

patent (R. 2014, 2067-2078). The features of the Whang ‘023

patent represent significant and non-obvious improvements

over the teachings present in DX J-1.

- 61. Dr. Beam testified that DX J-1 taught the optimum

bandwidth for a phase modulated modem to be any band-

width expressed as 100% , 50% , or anywhere down to zero (R.

2059). Optimum cannot represent an infinite number of

values, and Whang testified that optimum filtering considera-

tions for a phase modulation system (as stated in pages 209, 98,

Fig. 7-3 and page 56, Fig. 511 of DX J-1) meant 100% roll-off

or about twice the bandwidth claimed by Whang. The Whang

invention teaches and claims his composite filter means which,

when expressed mathematically in terms of roll-off of DX J-1,

B-42

requires a roll-off of from about 50% roll-off down to the ideal

or zero percent roll-off of the 1/T Nyquist limit (R.

2337-2345). The features of a narrowband composite “filter

means” of the Whang '023 patent represent a significant and

non-obvious improvement over the widebandwidth filters

recommended for phase modulated systems in DX J-1.

62. The features of the Whang '023 patent represent signifi-

cant and non-obvious improvements of the state of the prior

art represented by Western Union’s own modem design, and

the modem techniques of the existing prior art modems

evaluated and compared by Western Union (R. 369-372;

R. 395).

63. The Payne 023 patent led Ragsdale to the development

of the Ragsdale °381 digital coherent detection patent (R.

1109-1117). The digital detector of the Ragsdale ‘381 patent

accomplished phase locking of two signals of different fre-

quencies in a restricted bandwidth modem in spite of the

presence of repeated phase shifts in the same direction as

acknowledged by defendants’ expert Dr. Beam (R. 2086).

Originally, Dr. Beam asserted that the Kawai patent (DX Z)

and Lender patent (DX A-1) showed the method of deriving a

reference carrier for coherent detection. However, Dr. Beam

finally admitted that phase locking two such sinusoidal signals

of different frequencies was a difficult task (R. 2066), and fur-

ther admitted that he knew of no prior art that did what

Ragsdale did in the ‘381 patent and that included all the

technical things that Dr. Beam could think of (R. 2087).

Defendants’ own technical expert admitted that the Ragsdale

‘381 patent distinguishes over the prior art he was aware of,

and the claimed features of the Ragsdale 381 patent represents

significant and non-obvious improvements over all prior art

known by defendants’ technical expert.

64. The Bennett & Davey textbook (DX J-1) represents the

state of the art that existed prior to the invention date of the

Ragsdale ‘381 patent. That textbook at page 258 taught that it

B-43

was “impossible” to do what Ragsdale did in his ‘381 patent.

The claimed features of the Ragsdale "381 patent present

significant and non-obvious improvements and are a major ad-

vance over the state of the art as set forth in the textbook DX

J-1 (R. 2086-2089).

65. The defendants attempted to recontruct the principles

of the Payne ‘023 and Ragsdale 381 patents from a paper by

Wilson (DX 1-2). The Wilson paper includes a box labeled

“computer” where there could be almost anything, including a

general purpose computer (R. 2041, 2042, 2046, 2047). Dr.

Beam admitted that even a general purpose computer in

Wilson would have to be modified to accomplish the principles

of the Payne 023 and Ragsdale '381 patents (R. 2046-2048).

The circuits of the Payne '023 and Ragsdale '381 patents were

admitted by Dr. Beam as being novel over the functions of the

general purpose computer of Wilson (R. 2048-2054). The

Payne "023 and Ragsdale ‘381 patents define features which

represent significant and non-obvious improvements over DX

1-2.

66. The defendants’ expert Dr. Beam relied on the

Chomicki patent (DX X-1) in an attempt to show a comparison

between phase locking of Chomicki and odd-multiple phase

locking in the Ragsdale ‘381 patent. The Ragsdale ‘381

coherent detector is phase locked to the squared I.F so that the

zero crossing of the squared I.F., at pre-selected center sample

_ times, will occur at an odd multiple of one-half of the modula-

tion angle increment. An output lead from the 22.5° state of

the Ragsdale 381 binary counter is connected in the phase lock

loop. At the zero crossing time of the incoming I.F. during a

pre-sel@pted center sample interval the state of that 22.5° out-

put is employed by the loop to either add 2.8° or subtract 2.8°

from the counter depending upon whether the 22.5° counter

stage is in a “zero” or a “one” state at that sample time (R.

1109, 1110, 1111 and Summary of the Invention. Ragsdale

‘381 patent. Col. 2. lines 10-13). This causes the phase angle

B-44

outputs of the counter (which are compared to obtain the

phase shifts between successive modulation periods) to be ac-

curately related to the sampled portion of the received I.F. As

a result, coherent detection or measurement is made each

modulation period by the Ragsdale '381 detector.

66a. The foregoing feature of responding to the zero cross-

ings of an incoming I.F. at pre-selected center sample times

allows the Ragsdale "381 detector for the first time to (a)

operate successfully with repeated phase shifts in a restricted

bandwidth system, which phase shifts cause an apparent fre-

quency change in the carrier when received at the receiver,

and (b) frequencies, i.e., the 20.9 KHz I.F. and the frequency

shifted carrier. Neither Chomicki nor any other reference (in-

cluding Kawai or Lender) can successfully operate with

repeated phase shifts in a restricted bandwidth system that re-

quires phase locking two different frequencies together. None

of the references has a phase lock loop responsive to a pre-

selected sample time and a zero crossing of an I1.F. during that

sample time as claimed in the Ragsdale '381 patent. According

to Dr. Beam, none of the prior art could “* * * phase lock in a

restricted bandwidth system with repeated 90-degree phase

shifts, except the Ragsdale '381 patent * * *” (R. 3087).

66b. The Chomicki patent does not teach a coherent detec-

tor but discloses, instead, a “* * * circuit for adjusting of tim-

ing of a coded data receiver * * *” (Col. 1, lines 34-35 of

Chomicki). The phase locked loop of the Chomicki patent is

used to locate a bit period and to generate a sample signal

which is not “pre-determined” nor is it at the center of a

modulation period; but rather Chomicki generates sample

pulses either at the end of the first quarter of the bit period or

at the end of the third quarter of the bit period. As disclosed by

Chomicki at “* * * Figs. 2 and 3, (wherein) the line sample is

effected * * * at the end of the first quarter of the bit period

while in Fig. 4 the sample is effected * * * at the end of the

third quarter of the bit period * * *” (Col. 6, lines 17-23). The

B-45

line signal of Chomicki is a bi-phase type of signal that is used

to record data for tape transports (R. 2441). It is not a

modulated carrier signal which is converted at the receiver to

an I.F. or high frequency signal as is true in the Ragsdale '381

patent. Chomicki samples the polarity of a bi-phase signal at

two different bit periods to determine whether the received bit

is a “one” or a “zero” (Col. 5, line 60 of Chomicki patent), and

thus does not sample the phase of a received signal, nor does it

lock the data containing portion of a received carrier signal to

an odd multiple of the value of an output phase (a reference

signal) at a predetermined portion of each suggested modula-

tion period. The only relevance of Chomicki to the Ragsdale

"381 patent would be that Chomicki’s circuit, once it was

phase locked, could be employed as a clock and timing control

120 as shown in Fig. 2 of the Ragsdale 381 patent (R. 2441).

The defendants have failed to meet their burden of proof in

citing any prior art which is more relevant to the Ragsdale '381

patent than that cited by the Patent Office, and have not

rebutted the presumption of validity of the Ragsdale 381 pa-

tent. .

67. The Payne 023 and Ragsdale '381 patents define and

claim digital detectors. The defendants referred to a paper

describing an HC-270 modem by Hughes (DX G-1) as having

some portions of the circuits digitized, but Dr. Beam admitted.

that the detector described in DX G-1 is an analog detector (R.

1573, 1576) rather than a digital detector. In a similar man-

ner, the detectors of the Kawai patent (DX Z) and the Lender

patent (DX A-1 ) are also analog detectors (R. 1890, 2091

2092).

68. Analog detectors such as those disclosed by DX G-1, DX

Z and DX A-1, suffer from many problems associated with

analog detectors, which problems as testified to by Ragsdale,

were overcome by the digital detectors of the Payne '023 and

Ragsdale '381 patents (R. 1035-1039, 1112; R. 2438, 2439).

The digital detectors of the Payne ‘023 and Ragsdale '381

patents represent significant and non-obvious improvements

B-46

over the analog detector of the HC-270 described in DX G-1,

and over the analog detectors of DX Z and DX A-1.

69. Ragsdale testified that none of the defendants’ exhibits

that Dr. Beam referenced taught or suggested the claimed

features of the Payne ’023 or the Ragsdale "381 patents (R.

2442). None of the references introduced by the defendants

teach or suggest the significant improvements over the prior

art that are provided by the claimed features of the Payne '023

and Ragsdale '381 patents (R. 2442). The defendants have not

cited any prior art that is any more pertinent to the Payne '023

or Ragsdale 38] patents than that cited by the Patent Office in

the prosecution and issuance of the Payne 023 and Ragsdale

"381 patents (DX B and DX C).

70. All of the patents testified to by Dr. Beam with reference

to the three patents in suit were present either in the file

histories of the three patents in suit or were present in the

classes and sub-classes (PX 168, 169) which were searched by

the Patent Office Examiners in conjunction with the prosecu- |

tion and issuance of the three patents in suit. The defendants

did not introduce any prior art having teachings that rebut the

presumption of validity which is awarded in patents in suit

upon their issuance by the U.S. Patent Office (PX 168 and 169,

R. 1690-1692).

71. Defendants failed to prove that the inventors in filing

the applications which issued into the patents in suit did not

meet all of the requirements of 35 U.S.C. §§102, 103, 111,

112, and 115.

72. The Whang ‘023 patent, in the last means clause of

claim 25 states:

“filter means connected in the signal

transmission link between said

modulating and demodulating means, the

filter means being characterized as having

a passband width of about 1/T Hz, and

having a center frequency of fo; where:

B-47

T is the modulation period,

fo is the carrier signal frequency, and

Hz is cycles per second.”

Claim 19 includes a similar filter means clause with the ad-

ditional definition that three bits (eight levels) are grouped

together for 4800 bps modulation, and that the filter means is

further characterized by having a center frequency “selected

between 1600 Hz and 1800 Hz and a passband substantially

equal to 1/3 the data bit rate.”

73. Sang Whang wrote most of his own patent specification

(R. 2361) without the benefit of some of the existing textbooks,

such as Bennett & Davey (DX J-1) (R. 2307). Whang defined

the term used in his claims “passband width” of a filter in a

manner different from conventional definitions for filters as

they appear in the textbook. The Bennett & Davey textbook

defines bandwidth as being the Nyquist band, and will,

therefore, include filters with many different roll-off

characteristics such as 100% , 50% to zero percent. The Ben-

nett & Davey textbook uses the term roll-off to specify energy

bandwidth limits. A 50% roll-off or less is required to define

the narrow band filter means (composite filter) of the Whang

‘023 patent claims.

74. The filter means of the Whang patent must limit the

energy spectrum as close as practical to the so-called Nyquist

band (e.g., 800 Hz for 2400 bps and 1600 Hz for 4800 bps) in

order to use the minimum telephone bandwidth for transmit-

ting signal energy. Whang in his patent teaches that for a 2400

bps modem where 1/T = 800 Hz, the signal energy passed by

the filter means should not exceed 1000 Hz (Whang ‘023 pa-

tent, Col. 16, lines 17-24) and that for a 4800 bps modem

where T = 1600 Hz, the signal energy passed by the filter

means should not exceed 2000 Hz (R. 778; R. 2317, 2318).

75. The term passband width of about 1/T Hz as used in the

Whang ‘023 patent defines a filter which passes signals having

B-48

frequencies within the passband of 1/T Hz, i.e., 800 or 1600

Hz, and rejects within a few percent all signals having fre-

quencies more than 25% of the passband, i.e., 800 to 1000 Hz

and 1600 to 2000 Hz (R. 2317-2319).

76. It is only when the Bennett & Davey definition of filter

bandwidth is used in reading)claims 19 and 25 of the Whang

023 patent that such cldims may be read on a 100% roll-off

filter (R. 2402-2403). When these claims are read with the in-

ventor's definition of filter passband width, as set out in the

patent specification, the claims are limited to a composite

filter with a much smaller roll-off characteristic (50% or less),

which filter will pass a narrow band of signal frequencies as

compared to a wideband 100% roll-off filter. Only then is one

following the teachings of the Whang ‘023 patent as claimed

(R. 2403, 2411, 3513).

77. While both parties in this action differ about the proper

interpretation of “center-sampling” as disclosed in the original

specification, thé drawing of Fig. 12 of the original applica-

tion depicted a sampling operation which took place at the

center of the modulation period (R. 985, 986, 989). The defen-

dants have failed to meet their burden of proof that the draw-

ings as originally filed do not teach and disclose a center

sampling operation.

The evidence establishes that:

(a) the original specification teaches that the phase

angle of the carrier should be sampled “* * * in the mid-

dle of the modulation period (or) * * * at the center of

each modulation period (where) the phase angle * * ° is

substantially identical between the generated wave and

received wave * * (and that) the phase information in-

tegrity of the received signal is maintained only around

the middle third of the modulation period * * *.” (DX A,

pp. 8-9, 18, 19);

(b) the drawings of the application as filed teach an

apparatus (Fig. 12), which in fact samples the phase

B-49

angle of the carrier at the center of each modulation

period with an extremely short sampling interval (R. 985,

986, 989); and

field, accepted the adequacy of the original specification

and including center sampling (DX A, pp. 108-110, 118).

This is not a case where applicant broadened or changed his

claimed invention as set forth in the original application by an

Amendment filed at a later time. The original claims such as 6

and 11 cover the infringing modems as well as the Milgo 4400

series modems which were sold to Western Union and others.

Such original claims covered a phase modulated narrow band-

width modem with phase shift detectors at the receiver

without any limitation as to what portion of the modulation

period was sampled, e.g., center or ends. While the original

application and drawings disclose that one must sample in the

middle or center portion of the modulation period because of the

narrow band limiting, the original claims were not limited to a

demodulator which sampled at the center.

The Examiner, in an Office Action dated July 19, 1966,

questioned the operation of the multipliers and sample and

hold gates of the detector disclosed and described in the

original Whang application, and notes that “If gates 67-70 are

sample and hold gates and not AND gates, an illustration of

such gate should be given. “ In an Amendment filed October

10, 1968, the specification was amended to improve its form

and to achieve conformance of the drawings and claims with

the specification as originally filed. Gates 67-70 of Fig. 12

were redrawn and were labeled as “sample and hold gates.” in

Fig. 15, gates 67-70 were repetitious and such gates were

deleted from Fig. 15. The questions raised by the Examiner

concerning the timing at the receiver were answered by the

applicant in his Amendment. The Examiner entered the

above-noted Amendment, removed his previous inadequate

disclosure rejection, and did not further question center-

B-50

sampling at the receiver, nor the operation of semple and hold

gates in the Whang application (DX A, pp. 108-110, 118). No

new matter was added to the Whang application by the

above-noted or any other Amendment filed during the pro-

secution of the Whang °023 application.

[21] The patent Examiner handling the Whang ‘023 applica-

tion was well aware of his responsibility pursuant to 35 U.S.C.

§132, not to allow any amendments which introduced “new

matter” into the application because in the Office Action

dated July 19, 1966, he rejected certain application claims (39,

53 and 54) covering features not involved in this litigation.

These claims were rejected as being “drawn to new matter.”

The Examiner repeated his rejection based on new matter in

an Office Action dated February 14, 1968, and those claims

were deleted before the notice of allowance of the Whang ‘023

patent was issued from the Patent Office.

78. Since the filing of the original application on July 14,

1966, the written specification of the Whang ‘023 patent ap-

plication sufficiently disclosed the subject matter defined by

the claims in issue. The written specification and drawings of

the original Whang ‘023 application have at all times amply

supported the claims in issue of the Whang ‘023 patent. The

Patent Office Examiner during the prosecution of the Whang

‘023 patent was cognizant of the requirements concerning ade-

quate disclosure because certain claims to subject matter not at

issue in this action were rejected on the basis of inadequate

disclosure. Those rejected claims were canceled from the pa-

tent application before the Whang “023 patent issued from the

' «Patent Office on August 11, 1970 (DX A; R. 2307, 2368).

79. The specification of the Whang ‘023 patent contains a

description of the invention in such full, clear, concise and ex-

act terms as to enable the modem invention thereof to be made

and used by those skilled in the art. Those skilled in the art can

readily construct and operate a modem on the basis of the

disclosed subject matter of the Whang ‘023 patent (R. 2307,

B-37

Provision for sampling done at the middle of each modula-

tion time period in the order of 5 to 10 microseconds does not

appear in the application as filed nor the patent as issued.

52. On October 30, 1968 application claims 57, 58, 59 and

60 were submitted to the Patent Office (DX A. 89-90). These

claims were respectively re-numbered as application claims

58, 59, 60 and 61 by a Supplemental Amendment dated

November 1, 1968 (DX. A. 101).

The claimed elements of these claims were adequately

described in the specification and claims as originally

filed in the application (DX A, 4-55); and also as claimed

by claims 29, 30, 35, 36 which were submitted by the

Amendment dated March 29, 1968 (DX A, 63-66).

Re-numbered application claims 59, 60 and 61 include the

elements of issued patent claims 20, 21 and 22. These claims

are dependent claims; and the claim from which they were

dependent (claim 58) was objected to by the Examiner “as

being unclear” (DX A, 109) in an Office Action dated

February 14, 1969. Claim 58 was canceled and rewritten as

application claim 79 which ultimately issued (with minor

typographical correction) as independent claim 19 in suit. Ap-

plication claim 80 was filed in an Amendment dated March

29, 1969.

It likewise finds adequate support in the specification and

claims as originally filed. Application claim 80 issued as

claim 25 in suit.

53. On November 1, 1968, a further amendment in the ap-

plication was filed in which certain earlier claims presented

were canceled and rewritten and others were amended. This

amendment (DX A, pp. 101-107) was filed subsequent to an

interview with the Examiner at which the applicant Mr.

Whang and his attorney were present. In this amendment, the

concept of center sampling was included in the claims. In-

cluding the claims which were added by the amendment,

there now appeared in the application a total of approximately

45 claims.

B-38

54. The primary claims of the Whang ‘023 patent asserted in

this litigation, namely claims 19 and 25, on which all the other

claims asserted are dependent, include in substance the claims

previously made in claims bearing other numbers. In this

amendment of March 27, 1969 (DX A. pp. 111-117) applica-

tion claim 79 became claim 19 of the patent, and application

claim 80 became patent claim 25.

55. As set forth in Finding 32, prior art modems employed

wideband energy spectrum and two or four level modulation.

They required a special line conditioning to insure the ade-

quate performance of the modem. And, as set forth in Fin-

dings 23, 24, 25 and 32, Whang’s invention combined both

eight level modulation and extreme band limiting into one

modem to adapt the modem to the lousy line. No prior art

modems or referenees ever taught the industry to use only a

small narrow part of the line so that within that part all the

lines look alike and dependable.

56. Typical of the state of the prior art is the Bell 201

modem series and comparable modems provided by other

manufacturers. Such Bell-type modems are described in the

Baker patent (DX H-3), the Logan patent (PX 179), the Baker

paper (DX I-1) and the Bennett & Davey textbook (DX J-1).

Such Bell-type modems employ four phases and require a wide

energy spectrum from 600 to 3000 Hz for 2400 bps (DX 101,

page 116, Col. 3; R. 2337-2340; 2348-2355). The wide energy

spectrum is employed to recover a clock signal (PX 179). It is

conceded that if the composite filter disclosed and claimed in

the Whang ‘023 patent were inserted in the Bell-type modems,

such modems could not derive a clock signal (R. 1435, R.

2150). The Whang ‘023 patent in suit as claimed is awarded a

presumption of validity over the Bell-type modems which

were described in detail by the Patent Office in connection

with the examination and issuance of the Whang ‘023 patent

(DX A). The claimed features of the Whang ‘023 patent repre-

sent significant and non-obvious improvement over the Bell-

type modems and the following exhibits: DX W-3, PX 179, DX

I-1, and DX J-1.

B-51

2308). The asserted claims of the Whang ‘023 patent in suit

particularly point out and distinctly claim the Whang modem

invention, and one having ordinary skill in the modem art

when considering the asserted claims in light of the Whang

specification would know which modems are covered by the

asserted claims (R. 2307, 2308).

80. The defendants did not convincingly dispute Whang’s

testimony (R. 828, 843-879, 891-896, 902-925) that the

DS-4800 includes each and every element recited in claims

1-22, 25, 27-29, 31, 32, 36 and 37 of the Whang ‘023 patent in

suit or the equivalent thereof. Each of the elements of the

DS-4800 performs substantially the same function in substan-

tially the same manner to obtain the same end results as do the

corresponding elements of both the Whang ‘023 patent claims

and the Milgo modem 4400/48 which is covered by the Whang

‘023 patent (R. 921-923). The accused DS-4800 data set in-

cludes each and every element of the claims at issue of the

Whang ‘023 patent and such elements of the DS-4800 ac-

complish the same or substantially the same functions as

described and claimed in the Whang ‘023 patent in suit (R.

921-923 and Whang testimony at above-noted pages of the

Record).

81. Plaintiff's Exhibit 17 includes the claims at issue of the

Whang ‘023 patent in suit and includes drawings selected from

and accurately representative of the operation of the DS-4800

data set with each and every claimed element marked with

colors which match the corresponding components as depicted

in the drawings from the DS-4800 daca set manual as

presented in PX 17. Those claims, element-by-element and

function-by-function, were applied by Whang to show that

each and every claimed element and function is present in the

DS-4800 data set. Dr. Beam, although not prepared to adiait

literal word-by-word infringement by the DS-4800 of the

Whang ‘023 patent claims at issue, admitted the Whang ‘023

claims “are extremely broad * * * and that they could be read

B-52

on most any modem.” (R. 1994.) Dr. Beam only questioned

from an infringement standpoint whether the DS-4800 filters

satisfied the filter means of the Whang ‘023 patent claims (R.

1994); but he admitted that he had no technical reason to

doubt that the Milgo 4400/48 was covered by the Whang pa-

tent because he never tested a Milgo 4400/48 (R. 1997). In

fact, Beam never tested a DS-4800 (R. 1997) and accepted the

plaintiff's representation that the filter characteristics of the

DS-4800 were accurate and correctly shown in PX 17, page 24

(R. 1995, 1996). Whang’s testimony that the skirts of the

DS-4800 composite filter are virtually identical and are right

on top of the Milgo 4400/48 curve traced by test equipment in

Court (PX 148) was not disputed (R. 879). Beam admitted that

the amplitude characteristic of the composite filter for the

Milgo 4400/48 when expressed in roll-off is a very close approx-

imation to a .5 or 50% roll-off curve (R. 1481).

82. The accused DS-4800 data set includes each and every

element recited in claims 1-19 and 21 of the Ragsdale ‘381 pa-

tent in suit or an equivalent thereof. Each of the elements of

the DS-4800 data set perform substantially the same function

in substantially the same manner to obtain the same end

results as do the corresponding elements of both the claims in

suit of the Payne ‘023 and Ragsdale ‘381 patents (PX 20 and PX

19 respectively) as well as the corresponding elements of the

patented Milgo 4400/48 modem which is covered by the Payne

‘023 and Ragsdale ‘381 patents.

83. Plaintiff's Exhibit 19 includes the claims at issue in the

Ragsdale “381 patent colored with colors which are matched to

corresponding elements of the DS-4800 as depicted in draw-

ings from the DS-4800 manual, which drawings accurately

depict and correctly represent the operation of the DS-4800.

The claims of Ragsdale ‘381, element-by-element and

function-by-function, were applied by Ragsdale and disclosed

that each and every claimed element and function is present in

the DS-4800 (R. 1167-1222).

B-55

but rather relies on the doctrine of equivalents for infringe-

ment of all claims of the Payne ‘023 patent except for claims,

which claim plaintiff contends literally covers, element-by-

element and function-by-function, the DS-2400 data set (R.

1244, 1245; R. 1235-1263).

90. Plaintiff's Exhibit 22 includes the claims at issue in the

Payne ‘023 patent colored with colors which are matched to

corresponding elements of the DS-2400 as depicted in draw-

ings and function charts from the DS-2400 manual, which

drawings and function charts accurately depict and correctly

represent the operation of the DS-2400 (R. 1235, 1249, 1250).

The claims of the Payne ‘023 patent, element-by-element and

function-by-function, were applied by Ragsdale and proved

that each and every claimed element and function is present in

the DS-2400 (R. 1235-1263).

91. Dr. Beam denied that the DS-2400 was covered by the

Payne ‘023 patent claims because the counting means of the

DS-2400 is stopped briefly once each modulation period and

thus was not a “counting means for producing an output signal

which varies with time at a fixed repetition rate” as set out, for

example, in claim 1 of the Payne ‘023 patent (R. 1865).

Ragsdale calculated that the counting means of the DS-2400

runs for 99.77% of the time during each modulation period;

and when it is restarted, the counting means is pre-set as

though it had never stopped running (R. 2433-2435). The

counting means of the claims of Payne ‘023 is the functional

equivalent of the counting means of the DS-2400 (R. 2436).

92. Beam also denied coverage of the DS-2400 on the basis

that the counter was not physically separate from the first and

second storage registers and that the DS-2400 thus operated in

a different manner than the claims of the Payne ‘023 patent

(R. 1863-1880). Ragsdale showed that the counter of the

DS-2400 when stopped acted as a register and that the reset

and timing operation for the counter of the DS-2400 perform-

ed substantially the same function, in substantially the same

B-53

84. Plaintiff's Exhibit 20 includes the claims at issue in the

Payne ‘023 patent colored with colors which are matched to

corresponding elements of the DS-4800 as depicted in draw-

ings from the DS-4800 manual, which drawings accurately

depict and correctly represent the operation of the DS-4800.

The claims of the Payne ‘023 patent, element-by-element and

function-by-function, were applied by Ragsdale and proved

that each and every claimed element and function is present in

the DS-4800 (R. 1134-1165).

85. The defendants sought to distinguish the operation of

the DS-4800 from the claims of the Payne ‘023 and Ragsdale

‘381 patents on the basis that the DS-4800 did not have the

counting means called for in the claims because the counting

means in the DS-4800 includes two interrelated counters

designated by Dr. Beam as a divide-by-256 counter and a

phase difference, or reference, counter (R. 1898-1902). The

phase reference counter doubles as a first storage register when

stopped each modulation period, and Dr. Beam admitted that

such a counter when stopped is a storage register that stored

signals representative of 180°, 90° and 45°, i.e., multiples of

45° as claimed in the Payne ‘023 and Ragsdale ‘381 patents. It

is admitted that the DS-4800 employs a digital detector which

includes center sampling for phase angle determination (PX 5,

Admission 68, 70). The phase reference counter is connected to

and is controlled by the divide-by-256 counter. It was not

disputed by Dr. Beam that the entire circuit of the DS-4800

digital detector cooperates to produce an output signal which

is a measure of the phase difference in the data containing I.F.

input signal and that it has an oscillator, a high speed binary

counter, phase comparison circuits, registers, and adder and a

phase difference to data decoder circuit (R. 1898-1905).

86. Ragsdale testified that the only difference in operation

between the DS-4800 and the Payne ‘023 and Ragsdale ‘381

patents was that the patents disclose a parallel transfer of

signals from a counter to a register, whereas in the DS-4800

B-54

there is a serial transfer of signals from the divide-by-256

counter to the phase difference or reference, counter/register.

The claims at issue do not define either a parallel or serial

transfer and the defendants’ argument on this point is not cor-

rect because in both cases (parallel and serial transfer) there is

a measurement of the phase relationship from a counting

means with a selected I.F. transition of the input I.F. signal.

Both serial and parallel transfer accomplish the same end

result and are electrically and functionally equivalent to each

other; and, in any event, are not called out by the claims at

issue (R. 1135, 1161, 1162; R. 2413-2433).

87. An early Rixon drawing (PX 27 and PX 28) disclosed a

parallel data transfer of signals from a counting means to a

first register of a pair of registers. Although some doubt exists

as to some of the dates on the plaintiff's Exhibits 27 and 28, it

bears a 1969 date by A. Dargis (R. 1214-1216). The difference

between serial and parallel data transfer does not alter the

function of the DS-4800 in that the DS-4800 with serial data

transfer performs substantially the same function in substan-

tially the same manner to obtain the same end results as do the

corresponding elements of the claims in issue of the Payne ‘023

and Ragsdale ‘381 patents and as do the corresponding

elements of the 4400/48 which incorporates the claimed inven-

tions of the Payne ‘023 and Ragsdale ‘381 patents in suit (R.

1220-1222).

88. Defendants failed to prove that anything in the file

wrappers of any of the patents in suit prevented the plaintiff

from reading the claims in issue on the DS-4800 data set.

89. The accused DS-2400 data set literally includes each and

every element of claim 5 of the Payne ‘023 patent; and each of

the elements of the DS-2400 data set perform substantially the

same function, in substantially the same manner, to obtain the

same end results as do the claims at issue of the Payne ‘023 pa-

tent. Plaintiff does not contest the defendants’ position that the

DS-2400 does not include a storage register and comparing

means which is physically separated from the counting means,

B-56

manner, to obtain the same end results as the claims of Payne

‘023 (R. 1235-1263; R. 1263; R. 2436). Beam on cross-

examination agreed with the plaintiff that a counter can act as

a storage register, and that the phase difference counter of the

DS-2400 can act and serve as a register and adder. Beam also

admitted that the DS-2400 was a complicated operation (R.

2044). .

93. The defendants failed to prove that anything in the file

wrapper of the Payne ‘023 patent prevented the plaintiff from

reading the claims in issue on the DS-2400 data set.

94. UBC has sold and serviced modems which infringed

Milgo patent 3,524,023 and has actively induced infringement

of the Milgo patents by and through its wholly-owned sub-

sidiary Rixon II.

From the foregoing Finding of Fact on the general issues of

validity and infringement of plaintiffs patents, the Court

reaches the following:

Conclusions of Law

1. This Court has jurisdiction over the parties and over the

subject matter of this suit. Venue is proper in this District.

2. Plaintiff has title to United States Letters Patent Nos.

3,524,023 (Whang); 3,590,381 (Ragsdale); and 3,643,023

(Payne, et al) and is the owner of all rights thereunder in-

cluding the rights to sue for and to recover for past. infringe-

ment.

3. United States Letters Patent No. 3,524,023, entitled Band

Limited Telephone Line Data Communication System, as to

Claims 19-22, 25, 27-29, 31, 32 and 36-37, is in all respects

valid and subsisting in law.

4. United States Letters Patent No. 3,590,381, entitled

Digital Differential Angle Demodulator, as to Claims 1-12,

17-19 and 21, is in all respects valid and subsisting in law.

5. United States Letters Patent No. 3,643,023, entitled Dif-

ferential Phase Modulator and Demodulator Utilizing Relative

Phase Differences at the center of the Modulation Periods, as

to Claims 1-5, 7, and 10-20, is in all respects valid and sub-

sisting in law.

B-57

6. The invention defined in Claims, 19-22, 25, 27-29, 31, 32

and 36-37 of U.S. Letters Patent No. 3,524,023 would not

have been obvious to one of ordinary skill in the art at the time

the invention thereof was made.

7. The invention defined in Claims 1-12, 17-19 and 21 of

U.S. Letters Patent No. 3,590,381 would not have been ob-

vious to one of ordinary skill in the art at the time the inven-

tion thereof was made.

8. The invention defined in Claims 1-5, 7, 9-20 of U.S. Let-

ters Patent No. 3,643,023 would not have been obvious to one

of ordinary skill in the art at the time the invention thereof was

made.

9. Evidence of copying is properly admissible on the issue of

obviousness. Mott Corporation v. Sunflower Industries, Inc.,

314 F.2d 872, 137 USPQ 288 (10th Cir.).

10. Evidence of copying is properly admissible on the issue

of infringement. Lever Bros. Co. v. Procter & Gamble Mfg.

Co., 139 F.2d 633, 60 USPQ 76 (4th Cor.).

11. Each of the inventions of U.S. Letters Patent Nos.

3,524,023; 3,590,381; and 3,643,023, as to Claims 19-22, 25,

27-29, 31, 32 and 36-37; 1-12, 17-19 and 21; 1-5, 7 and 10-20,

respectively, are novel and useful and meet the requirements

of 35 U.S.C. §§101 and 102.

12. The undbvious requirement of 35 U.S.C. §103 is fulfill-

ed by an inventor who makes a new and useful improvement

where those skilled in the art have failed after repeated efforts

to do so. McCullough Tool Co. v. Well Surveys, Inc., 343 F.2d

381, 399, 145 USPQ 6, 20.

13. United States Letters Patent Nos. 3,524,023, 3,590,381;

and 3,643,023, as to Claims 19-22, 25, 27-29, 31, 32 and

36-37; 1-12, 17-19 and 21; 1-5, 7, and 10-20, respectively, are

infringed by Rixon II by its manufacture and sale of the ac-

cused data sets, and by UBC by the sale of the accused data

sets infringing Whang patent 3,524,034 until January 1, 1972.

Thereafter UBC actively induced the infringement of the

Milgo patents by and through Rixon II.

B-58

14. Each Conclusion of Law set forth in the foregoing Con-

clusions of Law deemed to be a Finding of Fact is hereby

found to be a Finding of Fact.

[appendix A omitted. ]

Findings of Fact on Issue of United's use of Rixon Il and UBC

as Mere Instrumentalities

Statement

The Court has determined that the patents of the plaintiff

were valid and that they were infringed by Rixon. Rixon is not

a party to this action and plaintiff seeks to impose responsi-

bility for the acts of Rixon and UBC on United and UBC on the

grounds and for the reason, as plaintiff contends, that Rixon

and defendant UBC were mere instrumentalities of United,

and, therefore, United is legally liable for what its subsidiaries

did.

Defendants have, among the other defenses raised by them,

denied that under existing rules of law applicable here, they

are not chargeable with the wrongful acts of Rixon.

This Court has had previous occasion to consider the matter

of whether a parent company, owning the stock of a sub-

sidiary, was using its subsidiaries merely as an instrumentality

to conduct its own personal business in perpetrating fraud or

injustice on third parties having dealings with the subsidiaries.

The Court is obliged to declare that,a holding or parent com-

pany has a separate corporate existence and is to be treated

separately from the subsidiary in absence of circumstances

justifying disregard of corporate entity. Other guidelines are

set forth in the excellent opinion of Judge Hill in the case of

Quarles v. Fuqua Industries, Inc., 504 F.2d 1358. To further

elaborate on the legal issue involved would serve no useful pur-

pose. The Court believes that plaintiff has failed to prove that

United exercised such control over its subsidiaries in this case

that they were merely instrumentalities to conduct United's

B-59

business. The domination by United over its subsidiaries has

not been shown to exist by a preponderance of the evidence.

After considering all the evidence, the well-prepared briefs,

the arguments of counsel and the Requests for Findings and

Conclusions on this issue, the Court makes the following:

Findings of Fact

1. The names of several individuals appear in the record and

they are identified, as follows:

From July 7, 1969, until January 13, 1970, James L. Hollis

was Chairman of the Board and Chief Executive Officer of

Rixon II. From July 7, 1969, to October 5, 1972, M. W. Hor-

rell was President of Rixon II and from January 13, 1970, to

October 5, 1972, he was Chief Executive Officer as well as

President of Rixon II. (DX E-2).

From January 8, 1970, and thereafter at all times relevant to

this suit Robert B. Liepold was President and Chief Executive

Officer of UBC and was not an officer, director or employee of

United (DX F-2), but he said he did report to Mr. Deaver as

his boss. |

Reed Manning was Vice-President of Technology of Rixon

Il.

Danny Deaver was Vice-President of United and its Chief

Executive Officer. He and Liepold voted shares of Rixon on

behalf of United to elect the Board of Directors and the Direc-

tors appointed officers of Rixon.

2. In October, 1968, United entered into an agreement in

principle to purchase Rixon I (PX 39/69). At that time, Mr.

James L. Hollis was Chairman of the Board, Chief Executive

Officer, substantial stockholder of, and the person that ran

Rixon I subject to restrictions or limitations of the Board of

Directors of Rixon I (R. 2230). Shortly after the agreement in

principle and prior to the actual transfer of assets, Mr. Hollis

told United's President that “* * * administrative direction

from Danny Deaver (United's Vice-President) will be no pro-

blem * * *.” (PX 40/117, parenthesis added).

- _

= Pe

B-60

3. Most of United's subsidiaries are telephone companies.

United has telephone subsidiaries in 22 or 23 states serving 3.1

or 3.2 million telephones through its telephone subsidiaries (R.

1608). United's telephone subsidiaries are collectively known

as the United Telephone System (PX 39/65).

4. In 1966 and subsequent years United acquired stock in

various non-telephone and non-utility industries. Its first such

acquisition was 49 percent of the stock of North Electric Com-

pany which is in the business of manufacturing telephone swit-

ching and peripheral and auxiliary gear to the switching

equipment (R. 1612-1613). United has also acquired other

non-telephone companies where it believed a profit potential

existed (R. 1613-1614). In almost every instance, United has

become the sole stockholder of its subsidiaries, both telephone

and non-telephone (R. 1614-1616).

5. United System Service, Inc., is a non-profit wholly-

owned subsidiary of United which is staffed with legal, adver-

tising, public relations, telephone engineering, inside and out-

side plant personnel that provides the corporate accounting

and corporate legal work for United and serves as a source of

expertise in various areas for the operating subsidiaries of

United (R. 1608-1609). Each subsidiary of United is charged

for and pays its proportionate share for services rendered to it

by United System Service (Deaver Dep. 117-118).

6. Until the beginning of 1972, United had officers and

directors but no employees (R. 1609; Baker Dep. 18).

7. On October 23, 1968, an agreement in principle was

entered into between Rixon Electronics, Inc., a Maryland cor-

poration (“Rixon I"), and United contemplating the acquisi-

tion by a subsidiary to be formed by United of the business and

assets of Rixon I in exchange for United stock (PX 43/200; R.

1717-1718). Earlier in October of 1968 D. H. Deaver, who

was then Vice-President-Manufacturing of United, was in-

volved in making an acquisition study of the business of Rixon

I (R. 1621; PX 39/67; Deaver Dep. 6).

Mipcl

B-61

8. As of December 12, 1968, an Agreement and Plan of

Reorganization was entered into between United and Rixon I

whereby United agreed to issue to Rixon I shares of United's

common stock in exchange for the conveyance by Rixon I of all

of Rixon I's business and assets, less certain cash and

marketable securities retained by Rixon I (DX G-2). The

Agreement provided for a number of contingencies which

were conditions precedent to the sale and transfer of Rixon I's

assets and business pursuant to the Agreement (DX G-2).

These including, among others, favorable action at a

stockholders’ meeting of Rixon I and the absence of any

material adverse change in the financial condition of Rixon I

(DX G-2). The stock of Rixon I was listed on the American

Stock Exchange (Horrell Dep. 37).

9. On July 3, 1969, the formal transfer of the assets of Rixon

I to Rixon II took place. In July, 1969, the by-laws of Rixon II

provided that the Chairman of the Board would be the Chief

Executive Officer (DX E-2). At this time, Mr. Hollis was the

Chairman of the Board of Rixon II and according to Mr.

Deaver, the Chief Executive Officer of a United subsidiary

had the responsibility for running the company (R.

1653-1654).

10. On July 14, 1969, Mr. Deaver in a letter to Rixon’s Presi-

dent Mr. Horrell set out the guidelines as to how Rixon was to

be managed (R. 1783-1785). In this letter, Mr. Deaver stated

that Mr. Horrell would have “direct responsibility for manag-

ing and directing the day-to-day activities of Rixon Electronics

** *.” (PX 96). Mr. Deaver acknowledged a difference bet-

ween the responsibility for running the company by setting the

basic management policies. In the letter to Horrell, Mr.

Deaver set out twelve key management policy matters which

had to be discussed with him before they could be im-

plemented by anyone at Rixon. Such matters included capital

expenditure budgets, research and development budgets,

financing requirements and arrangements, major pricing

policies and changes, selection and appointment of officers

B-62

and principal department heads and other department

changes, salary increases, where the resultant would exceed

$20,000 per year, and any changes in overall compensation

policies of the company, union contract negotiations, patent

licenses, etc. (PX 96).

11. On May 23, 1969, United caused to be organized a

Maryland corporation named new Rilexo, Inc. (“Rixon II”), as

a wholly-owned subsidiary (DX E-2 and G-2). On July 3,

1969, United issued to Rixon I 597,105 shares of its common

stock, and Rixon I transferred and conveyed to Rixon II all of

its business and assets (including, without limitation, its

patents and permits), except certain cash and marketable

securities retained by Rixon I (DX G-2). Rixon II assumed all

of the liabilities and obligations of Rixon I then existing, except

Rixon I's expenses relating to the transaction and certain

outstanding stock options of Rixon I under its Employees’

Stock Option Plans, which options were assumed by United

(DX G-2). Rixon I changed its name to Rixon Liquidating

Corporation after July 3, 1969, and remains in existence today

in an active state (R. 2175).

12. United never at any time owned any stock of Rixon I and

neither United nor any of its subsidiaries were represented on

the Board of Directors of Rixon I (R. 1628). No directions or

instructions of any kind were given by United or any of its sub-

sidiaries to Rixon I (R. 1628). No evidence was introduced in

the case showing any ownership, participation in manage-

ment, or control by United or any of its subsidiaries of Rixon I.

13. Just prior to the transfer of assets to Rixon II, Mr.

Deaver informed Mr. Hollis that any disputes between them

concerning the operation of Rixon II would be resolved by the

Board of Directors of Rixon II as long as resolution of the

Board was not in conflict with basic United policy (PX

40/110). Deaver and later Liepold voted the shares of Rixon on

behalf of United to elect Board of Directors (DX E-2, R.

1809-1810), and the Directors appointed the Rixon officers.

B-63

14. In January, 1970, United formed and completely fi-

nanced a wholly-owned subsidiary, UBC (R. 1645). Rixon

stock ownership was turned over to UBC (DX F-2), as was the

commercial sales activities for all Rixon products with the ex-

ception of Government sales.

15. The organization of Rixon II by United and the acquisi-

tion by Rixon II of Rixon I's assets and business were for

legitimate business reasons (PX 39/87). There was no evidence

introduced to show that Rixon II was organized or Rixon I's

assets and business acquired for any illegal, improper, or

fraudulent purpose, with respect to Milgo or any other person

or corporation.

16. From the time that Mr. Hollis died in April of 1970 until

Rixon II's assets were sold to Sangamo Electric Company in

September of 1972, the Rixon Board and the UBC Board were

comprised of virtually the same members (PX 180, PX

38/64B).

17. Mr. Deaver was Chairman of the Board of UBC from

April 13, 1970 through September of 1972, and Mr. Liepold

was President of UBC and Chairman of the Board of Rixon II

from August, 1970 through September, 1972 (DX E-2, DX

F-2).

18. Rixon II was required to furnish detailed monthly finan-

cial operating reports to Deaver and Liepold and others (PX

39, pp. 65, 114, R. 1757-1758).

19. United either provided the operating capital for UBC

and Rixon by direct loans, or by guaranteeing loans from in-

dependent banks (PX 43/219D,R. 2208, PX 40/116/). Rixon’s

Treasurer, Mr. Relyea, admitted that early in 1970 Rixon II

could not have repaid the loans from United (R. 2239).

20. In September of 1970, Rixon management requested

permission from Mr. Liepold to obtain authorization from

Milgo to manufacture the infringing modems (PX 29/5 and

29/6). Liepold denied the request.

B-64

21. From the time of its organization on May 23, 1969, until

June 24, 1970, when the stock of Rixon II was transferred by

United to UBC, the stock of Rixon II was wholly owned by

United (DX E-2 and F-2). UBC was organized as a Kansas cor-

poration on January 5, 1970 (DX F-2). It was organized to

enter the business of selling, engineering, installing and servic-

ing private voice and data communications equipment, ser-

vices and systems for sale or lease to business users (R. 1632).

After the Carterfone decision wherein the FCC decided in

1968 that telephone subscribers could own or lease equipment

that interconnects with the nationwide telephone system,

United believed that there would be new business oppor-

tunities in supplying customers who desired to own their own

end equipment and studied the creation and addition of a

voice and data business communications system (R. 1629-

1631). The outgrowth of this study was the formation of UBC

(R. 1631). The original concept of the scope of UBC’s activities

and business was to provide a business customer his own

owned voice and/or data communications system (R. 1632). It

was not intended that UBC be limited to the marketing of pro-

ducts of United affiliated companies (R. 1632). The original

concept behind UBC was never achieved, but UBC did enter

into the marketing of products of non-United affiliated com-

panies as well as United affiliated companies, including pro-

ducts of Rixon II (R. 1632-1633).

22. The business of Rixon I had been primarily but not ex-

clusively government contract business, and its sales program

relied principally upon manufacturer's representatives (PX

39/67). There were discussions between Rixon and United of

Rixon expanding into the commercial field, and both United

and the management of Rixon II were in favor of this develop-

ment (R. 1633-1634 and 2179-2180).

23. On June 24, 1970, United transferred to UBC all of the

outstanding stock of Rixon II, and Rixon II was at all times

thereafter a wholly-owned subsidiary of UBC (DX E-2).

B-65

24. Beginning in July, 1970, UBC undertook the marketing

of certain products of Rixon II, including modems later charg-

ed by plaintiff as infringing plaintiffs patents. At the time

UBC undertook the marketing of Rixon II products neither the

Whang ‘023 patent nor the other patents involved in this suit

had been issued.

25. The organization of UBC, the transfer of the stock of

Rixon II to UBC, and the transfer of commercial marketing

responsibilities to UBC for products of Rixon II and other

United affiliated and non-United affiliated companies were

for legitimate business purposes (PX 29/70; R. 1629-1633).

There was no evidence introduced to show that UBC was

organized or functioned as a sham or for any illegal, improper,

or fraudulent purpose, with respect to Milgo or any other com-

pany or person.

26. The Rixon marketing function was transferred back

from UBC to Rixon II on January 1, 1972 (R. 2198; PX

41/121). At that time certain Rixon II products in UBC’s in-

ventory were considered obsolete and were written off by UBC

at the request of a joint committee meeting between

employees of Rixon II and UBC. The largest part of the inven-

tory of currently marketable finished products was retained

physically by UBC in its warehouse for Rixon II under an ar-

rangement whereby payment of the transfer price by Rixon II

to UBC was deferred until the products were sold by Rixon II

to its customers. As Rixon sold these products and they were

shipped to Rixon customers in 1972, Rixon II reimbursed UBC

at the transfer price that Rixon had originally charged UBC

when the products were sold by Rixon II to UBC, plus interest

from January 1, 1972 (R. 2198; PX 72).

27. The UBC warehouse was contiguous to the Rixon

buildings and was manned by Rixon employees, but the costs

of building rent, telephone, salary for the Rixon employees,

etc., were accumulated by Rixon II and charged to and reim-

bursed by UBC on a monthly basis (R. 2199; Horrell Dep. 38).

UBC paid rent for the warehouse space to Rixon II (R. 2199;

Liepold Dep. 41).

B-66

28. By way of a letter of intent (PX40/115) dated August 18,

1972, United and Sangamo Electric Company proposed

(among other things) to form “a joint venture corporation to

be owned by United Telecommunications, Inc. or United

Business Communications, Inc. (hereinafter called United)

and Sangamo Electric Company (Sangamo), for the purpose

of engaging in the design, manufacture and sale of telecom-

munication equipment and related products.” The joint ven-

ture company became Rixon III. United and Sangamo also

proposed that the “* * * net assets to be contributed by United

shall be essentially those assets owned or used by Rixon Elec-

tronics, Inc. (Rixon III) , a wholly-owned subsidiary of

United, (including certain inventory of Rixon manufactured

products held by United Business Communications, Inc. to be

transferred to Rixon) * * *.” United also proposed with

reference to this lawsuit to hold Rixon III “harmless against

damages arising out of all such claims (by Milgo) to date and

extending to all deliveries of said equipment (DS-4800) during

the three years after the effective date of the joint venture.”

(Material in parenthesis added, page 5 of PX 40/115). On Oc-

tober 1, 1972, by an Indenture of General Conveyance and

Assumption of Liabilities between Rixon II and Rixon III, Rix-

on II conveyed substantially all of its assets and business to Rix-

on III organized by Sangamo (DX H-2). The transfer price of

the Rixon assets was the book value thereof (R. 2206).

29. There is no evidence that on or after January 1, 1972.

UBC sold any of the allegedly infringing modems. All sales of

Rixon II modems on or after January 1, 1972, were by Rixon II

(R. 2198, PX 72).

30. United through its Executive Committee and Board of

Directors was responsible for establishing overall policy goals

and objectives for the entire United operation. Through its Ex-

ecutive Committee it provided guidance and assistance to in-

dividual subsidiaries but, generally, initiative was left to the

subsidiaries. Each subsidiary was required to accept mutually

B-67

agreed upon objectives and responsibilities but was not subject

to day-to-day United supervision of its operations. Rixon II

and the other subsidiaries were free to accept or reject United’s

staff services as deemed appropriate by Rixon management

and transactions between United subsidiaries were at arms

length (R. 1616, 1618, 1635, 1636, 2192; PX 40/110).

31. Rixon II was responsible for defining its objective and

the methods it intended to accomplish what it projected. It

was required to spell out the reservations it might have over

which it had no control and it had to define how it would be

affected if those objectives were not accomplished (R.

2189-2190).

32. Mr. Deaver approved most of the loans to Rixon II on

behalf of United, and the moneys borrowed by Rixon II were

carried by Rixon II as an obligation and were hoped to be

repaid (R. 1799, 2200). As early as 1970, Rixon II's financial

condition had deteriorated to the point where it could not

have repaid the loans (R. 2239). Interest on the borrowed

money was paid monthly by Rixon II (R. 2200).

33. Each subsidiary of United was managed as a profit

responsible unit which was required to accept mutually agreed

upon objectives and responsibilities but was not subject to day-

to-day United supervision of its operations and was expected to

stand on its own two feet; it had to provide its own personnel,

the number and cost of which should be compatible with pro-

fit center objectives (PX 40/110; R. 2189-2190; Deaver Dep.

47).

34. The individual subsidiaries of United pay their own of-

ficers and employees (R. 1621).

35. The individual subsidiaries prepare their own budgets,

which are reviewed by their respective Boards of Directors (R.

1621).

36. No day-to-day guidance was furnished by Mr. Deaver or

anyone else from United to Rixon II (R. 1635-1636).

B-68

37. The Rixon II Board meetings were free flowing discus-

sions on any of the problems, a source of exchange of ideas and

a determination of finally what would be done (R. 1635).

There was no domination of any directors meetings of Rixon II

by any one or two individuals (R. 2187). Rixon II was respon-

sible for defining its objectives and the methods it intended to

use to accomplish what it projected (R. 2190).

38. Other than general guidelines set down by United there

was no interference in day-to-day operations of Rixon II.

39. Neither United nor UBC ever directly or indirectly paid

the operating expenses of Rixon II (R. 2206). However, Rixon

II had to borrow money from United to pay such operating ex-

penses (R. 2239).

40. Rixon II hired and fired its own employees (R. 2207).

41. Rixon II kept separate books and records, prepared its

own budgets, which were subject to review by its Board of

Directors, had separate offices from UBC and/or United, had

a separate payroll from which it paid all of its own officers and

employees (R. 2201-2202; Horrell Dep. 37).

42. The President of Rixon II controlled the engineering

department and the research and development department of

Rixon Ii (R. 1649). The quality control facilities at Rixon II

were controlled by the manufacturing operation which

reported separately to Mr. Horrell (R. 1649-1650).

Neither Mr. Deaver nor anyone at United dictated or in-

structed Rixon II concerning the arrangement of plant

facilities of Rixon II (R. 1650).

43. Mr. Relyea, Treasurer of Rixon II, was primarily in

charge of pricing Rixon products until UBC took over the Rix-

on marketing functions in June of 1970 (R. 2181). During the

time that UBC had the marketing function, until January 1,

1972, Rixon II continued to make manufacturing cost

estimates and recommended the establishment of transfer

prices between Rixon II and UBC (R. 2181). Rixon II sold its

products to UBC for a price which returned Rixon II's full

B-69

manufacturing costs, its indirect costs, and a margin profit on

its investment (R. 2181).

44. Mr. Relyea, although not a director, attended the

meetings of the Board of Directors of Rixon II and kept the .

minutes of such meetings (R. 2184-2185). There was no

domination of the directors’ meetings and Rixon II by any one

or two individuals.

Mr. Relyea, Treasurer of Rixon II, was never given instruc-

tions by Mr. Deaver as to what he should do. Mr. Relyea’s in-

structions came from either Mr. Hollis or Mr. Horrell

(R.2192).

Generally, Rixon II was responsible for developing its own

operating, planning and procedures and at regular intervals

reported these plans through the President and Board of Direc-

tors of Rixon II (Relyea Dep. 95).

UBC did not make loans to Rixon II (Liepold Dep. 48).

45. During the years involved in this lawsuit United filed a

corporate consolidated federal income tax return. Each sub-

sidiary figured its own tax on a stand-alone basis and paid to

United the funds for such taxes. The returns were consolidated

and the final return paid for by United. Any subsidiary which

had a loss, and, thus, would be entitled to a refund under the

tax laws, would be given a refund by United in the same way

that they would have received their refund if they were repor-

ting directly to IRS (R. 1619; Liepold Dep. 53). If any sub-

sidiary had a loss carry-forward, United would give the sub-

sidiary credit for the amount the subsidiary would have receiv-

ed under the loss carry-forward provision (R. 161 9-1620).

46. During the time that UBC was marketing products of

Rixon II the price charged by Rixon II to UBC was a

negotiated price, fair to both companies. Mr. Deaver was not

consulted with respect to the pricing (Liepold Dep. 60, 61).

The transfer price was designed to yield to Rixon the full

return on their cost and operating expenses and “* * * some

‘nominal profit in the area of five percent * * *.”

B-70

The day-to-day operations of UBC were in the hands of Mr.

Liepold and the UBC organization. Although Mr. Deaver was

on the Board of Directors of UBC, neither he nor anyone at

United gave any directions or intructions to UBC employees

(R. 1646).

47. UBC and Rixon kept separate and independent books

and records, did their own hiring and firing, had separate

payrolls from each other and from United, handled the pur-

chasing of their own supplies, made their own budgets, and

submitted these budgets to their respective Boards of Direc-

tors, and kept separate corporate minutes, and kept separate

corporate minute books (R. 1647; DX E-2; DX F-2).

48. Neither Rixon II, UBC, nor United used property com-

monly (R. 1650).

49. United advances funds to its subsidiaries, including Rix-

on II and UBC, which request financing on a temporary basis

(R. 1617; Baker Dep. 43). The ability of the subsidiary to

repay the loan is only one of the factors considered by United

in loaning money to its subsidiaries (Deaver Dep., pp.

136-137). All subsidiaries of United are free to go to any other

lending agency to borrow funds (R. 1618). All of United's sub-

sidiaries have their own bank lines and borrow from banks if

their credit is acceptable (R. 1618, 2201 ). United charges in-

terest on the money it advances its subsidiaries at the prime

rate plus one-half percent (R. 1618). United's lending to its

subsidiaries is usually unprofitable for United (R. 1618).

50. The day-to-day operations of UBC were in the hands of

Mr. Liepold and the UBC organization. Mr. Deaver was on

the Board of Directors of UBC but, to Mr. Deaver’s

knowledge, neither he nor anyone at United gave any direc-

tions or instructions to UBC employees (R. 1646).

51. Mr. Deaver was designated by United to follow the non-

telephone subsidiaries and report to the Board of Directors of

United regarding them (R. 1708). Mr. Deaver requested that

(1) earnings and cash forecasts, (2) capital expenditure

“yy

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budgets, (3) research budgets and major research projects, (4)

new fields of endeavor, (5) abandonment of existing fields of

endeavor, (6) new financing requirements and arrangements,

(7) major pricing policies and changes, (8) major organization

changes, (9) salary increases over a certain amount, (10) union

contract negotiations. etc. “* * * be discussed with me before

finalization or implementation” (PX 96. at 2).

52. Mr. Horrell, President of Rixon II, was advised by

memorandum from Reed Manning, Vice-President of

Technology of Rixon II, dated September 3, 1970, of the is-

suance of the Whang ‘023 patent and of “our first engineering

opinion * * * that we could not get around all of the patent

claims and still design a modem that would be anything like

the PM48 concept.” Mr. Manning also suggested setting up a

reserve fund to cover potential royalty payments (PX 29/6).

Mr. Horrell discussed the matter with Mr. Liepold, and they

discussed the matter at a meeting with Rixon II engineers. Mr.

Manning, one of the engineers in attendance at the meeting,

was of the opinion “* * * that this was a possible

infringement.” Mr. Liepold could not recall any of the other

engineers at the meeting but stated that it was his recollection

the collective opinion was that there was no clear-cut indica-

tion that the patents were being infringed. Neither Mr. Hor-

rell nor Mr. Liepold reviewed the Milgo patent in detail. Mr.

Liepold could not even recall one of the reasons on which the

opinion of non-infringement was based. Mr. Liepold did not

request any opinion from outside counsel or even “anyone on

the legal staff of United or the Service Company” as to

whether or not the Vice-President Reed Manning was correct

in his opinion that the Milgo patent was possibly infringed.

Liepold did not discuss the question of patent infringement

with anyone else at UBC or United (Liepold Dep. pp. 18-24;

Horrell Dep. pp. 30-31).

53. There is no evidence in the record showing any written

complaint by Milgo to United, UBC or Rixon II of any alleged

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infringement of the Whang ‘023 patent until the filing of

plaintiff's complaint in the instant suit. However, Milgo in-

formed Rixon II's modem scientists that it had patents pending

covering the subject matter of the patents in suit as early as

July, 1969 (PX 29/4). At least Rixon II's and UBC’s manage-

ment had notice that Rixon II's Vice-President Manning con-

sidered that the Whang ‘023 patent was possibly infringed by

the defendents’ modems as early as September, 1970 (PX

29/6).

54. There is no evidence in the record showing any notice by

Milgo to United, UBC or Rixon II of ‘any alleged infringement

of the Ragsdale ‘023 or the Ragsdale ‘381 patent until the filing

of Milgo’s motion to file its amended complaint on August 11,

1972. However, the Ragsdale patent ‘381 was called to the

defendants’ attention on February 14, 1972, during the

deposition of Mr. Al Dargis, a Rixon employee (PX 32). This

patent makes reference to the application which issued as the

Whang ‘023 patent.

55. Except for Mr. Horrell, who became a director of UBC,

no officer or director of United or UBC ever served as an of-

ficer of Rixon II (Deaver Dep. 79).

56. Each Finding of Fact set forth in the foregoing Findings

of Fact deemed to be a Conclusion of Law is hereby found to

be a Conclusion.

From the forgoing Facts on the issue of use by United of Rix-

on and UBC as mere instrumentalities, the Court reaches the

following:

Conclusions of Law

1, Rixon II was not the mere instrumentality, alter ego, or

agent of United at any time after August 11, 1970.

2. Rixon II was the mere instrumentality, alter ego, or agent

of UBC.

3. United has never made, leased, used or sold a Rixon data

set, Model PX-48 or DS-48 or DS-2400.

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4. On or after January 1, 1972, UBC did not make, lease,

use or sell a Rixon data set. Model PM-48 or DS-4800 or

DS-2400, but UBC did thereafter actively induce infringement

of the claims of the Milgo patents through its subsidiary Rixon

Il.

5. At no time did United actively induce infringement of

any of the claims of the alleged Milgo patents involved in this

suit.

6. Each Conclusion of Law set forth in the foregoing Con-

clusions of Law deemed to be a Finding of Fact is hereby

found to be a Finding of Fact.

The Court reserves ruling on the issue of willfulness until the

matter of damages is considered.

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APPENDIX C

UNITED STATES COURT OF APPEALS

For THe TentH Ciacurr

No. 78-1624.

MILGO ELECTRONIC CORPORATION,

A Florida Corporation,

Plaintiff-Appellee,

UNITED BUSINESS COMMUNICATIONS INC.,

a Kansas Corporation,

Defendant-Appellant.

Argued Jan. 23, 1980.

Decided May 29, 1980.

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 Thomas, Lysaught, Bingham and

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, Kan-

sas City, Mo. (John F. Dodd, Shawnee Mission, Kan., and

Robert D. Benham of McAnany, Van Cleave & Phillips, Kan-

sas City, Kan., with them on the brief), for defendant-

appellant.

Before BARRETT, DOYLE and LOGAN, Circuit Judges.

PER CURIAM.

United Business Communications, Inc. (UBC) appeals from

an adverse judgment in a Patent infringement action initiated

by Milgo Electronics Corporation (Milgo). Bifurcated trials to

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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 infr-

inged 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 ‘0 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 il; and the

damages awarded.

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

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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 transmis-

sion of data, the speed of transmission is usually defined in

“bits” (“1” or “O”) per second or “bps”.

Telephone lines designed for voice communication have a

bandwidth of approximately 300 to 3000 Hertz (Hz).' 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 adapted for data transmission. Leas-

ed 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 dialed up lines

are more difficult to utilize for data transmission than leased

lines, and the less expensive leased lines, e. gz. 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 nar-

' One Hz equals one cycle per second.

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rowed, 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 con-

sidered “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 net-

work.

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 with 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 con-

sidered 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 limita-

tion 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 in-

terest at Western Union:

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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

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