# Appendix — Ex parte Phillips

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1943
- **Citation:** 320 U.S. 714

## Text

APR 20 3943
— LES ELMORE CBBPLEY
fs OLE RK

—

‘Supreme Court of the United States

OCTOBER TERM, 1942

9457946 © 989

FORD MOTOR COMPANY,
Petitioner,

vs.

THE GORDON FORM LATHE COMPANY,
Respondent.

Transcript of Record

On Petition for Writ of Certiorari to the United States Circuit
Court of Appeals for the Sixth Circuit

VOLUME I.
Trial Papers, Plaintiffs Record and Part of
Defendant’s Record.

I, Josero Farzey,
1664 National Bank Bldg.,
Detroit, Michigan,

Coorzr, Kerr & DunHam,
Woolworth Bidg., 233 Broadway,
New York, New York,

Attorneys for Petitioner.

Lecuer, Micnart, Wuyte & Spoun,
110 East Wisconsin Ave., Milwaukee, Wisconsin,

Ricuey & Warts,
Union Commerce Bldg., Cleveland, Ohio,

Swan, Favs & Harpesty,
Ford Bidg., Detroit, Michigan,

Attorneys for Respondent.

United States Circuit Court of Appeals

FOR THE SIXTH CIRCUIT.

THE GORDON FORM LATHE COMPANY,
Plaintiff-Appellant and Cross-Appellee,

VS.

FORD MOTOR COMPANY,
Defendant-Appellee and Cross-Appellant.

Equity No. 4564.

APPEAL F'RoM
Tue District Court oF THE UNITED SraTEs,
Kastern District or MIcHIGAN,
SovuTHERN Division.

TRANSCRIPT OF RECORD.
VOLUME I.

Trial Papers, Plaintiff’s Record and Part of
Defendant’s Record.

Lecuer, Micnart, Wuyte & Spon,
110 East Wisconsin Ave., Milwaukee, Wisconsin,

Ricuey & Watts,
Union Commerce Bldg., Cleveland, Ohio,

Swan, Frye & Harpesry,
Ford Bldg., Detroit, Michigan,
Attorneys for Plaintiff-Appellant and
Cross-Appellee.

Bopman, LoncLey, Bocie, Mippteton & Far .ey,
1400 Buhl Bldg., Detroit, Michigan,

Coorer, Kerr & Dunnam,
Woolworth Bldg., 233 Broadway,
New York, New York,
Attorneys for Defendant-Appellee and
Cross-Appellant.

apne cece: —
RR ee IO Me BHM ot ED

INDEX.

VOLUME I.

Trial Papers, Plaintiff’s Record and Part of
Defendant’s Record.

CR na Sb 6h Gb cen eins aoe el vehiee boekconse cieeeetrees
GOS Oh POI Soi as ccc escsvcdareessieeuiensecdeveuns
Report of Gpocial Master... .ccscccccveccsscccesccceses

I. Nature of Invention and History of Litigation and
of Defendant’s Use of Machinery.................

i Ee a ca waren ew eeue

III. Accounting Period, and Production of Shafts on In-
fringing Machines: Question of Notice............

A. Boplmming Of Period. ...ccccccscvccvesccccses

B. Production of Camshafts and End of Accounting
WUE cn cecbeeesdeb4densse keane oussee sees

es PN cd nus 0555000540000 Sad eecResaeeresescuNs
A. Profits from Infringement....................

1. Standard of Comparison...................

a. Standard for Model A Shaft............

(1) Pioch and Modified Walcott Machines

(2) Westinghouse Lathe ...............

(3) Ford Cam Shaper..................

b. Standard for Tractor Shaft.............

e. Effect of Choice of Incorrect Standard...

2. Savings from Use of Infringing Machines...

a. Savings or Loss in Other Operations:
UNIO Succ weueuuataceccacsunans

b. Savings in Cam-Roughing Operation.....
(1) Direct Labor Savings...............

I

Sle 5 yc See gee SE aN, Se Bier inne connt
GRE Oe IOS EPR LRT i NPI es ATEN AOD ark EY

36

VLD ERLE PSOE INL UNTIL BRS

(a) Speeds of Production on Model T

DES on utevsdunssecerevecends 43
(b) Speeds of Production on Model A

UE: Skanensaeasavaceedveses

Report of Special Master

things being equal. Because of that doubt, I think the
speed of the Model A shaper should be reduced an addi-
tional 10%, resulting in a final figure of 18 shafts per ma-
chine hour or 36 per man hour (which is approximately
18% under the speed adopted by defendant’s account,
which was based upon the relative perimeters of the Model
A and Model T shafts). Defendant makes no allowance
in its accounts for slower speeds on the modified shaper,
claiming that the original shaper was designed very con-
servatively and that by substitution of a light alloy ram
and a stronger driving mechanism it could have stepped
up the speed of the original by at least 50%. While it may
be that this could have been done, I do not think that factor
ean be taken into consideration in determining speeds in
this lawsuit. The improvements suggested were never made
by defendant, even with the nine shapers ordered in 1923,
although the same necessity was present for making them
then as now. It is to be noted that the speed of the Wal-
cotts could similarly have been, and later was, increased
by rearrangement of the overhead cams, but no claim is
made that the faster speed should be used for the account-
ing period.

46

(c) Speed of Production on Tractor Shaft.

It is agreed that the grinder produced tractor cam-
shafts at an average rate of 8 per machine and man hour.
There is a dispute, however, as to whether the rate of pro-
duction on the Walcott lathes was 15 or 20 per machine
hour, although the use of one or the other of these figures
does not make a very substantial difference in the result.
A time study in defendant’s English plant showed a pro-
duction speed of slightly less than 15 tractor shafts per
hour, but information is not available as to motor speeds
or handling methods in that plant and it seems probable
that a higher rate of production was obtained in the United
States. The recollection of speeds by Ford employees
ranged from 15 to 25. The guaranteed production was 30.
In my opinion, the figure of 20 shafts per machine hour or
40 per man hour should be adopted, which figure is very
close to that which is obtained by reducing the speeds found
for the Medel T and Model A shafts in inverse proportion
to the greater periphery of the tractor cams.

_d
pers ” ms FR LT IIE aa oe

Report of Special Master 47
(2) Orer Savincs: OVERHEAD oR BURDEN.

The next problem is to determine the savings of de-
fendart, if any, from infringement, in manufacturing ex-
pense other than direct labor and materials. In defendant’s
accounting system, all such expenses are grouped under the
heading of burden. It is obvious that some burden costs—
e.g., machine depreciation and repairs—will vary with the
type of machinery used to perform a particular operation;
and, in addition, a variety of indirect expenses may be
affected. Defendant’s burden costs as of the time of the
trial were broken down into thirty-one different items,
thirty of which are applicable to the accounting period and
which I set forth here for the court’s information, as fol-
lows:

‘*Administrative salaries; depreciation of land im-
provements; depreciation of buildings; depreciation of
machinery ; depreciation of durable tools; depreciation
of factory and miscellaneous equipment; depreciation
of freight car equipment; depreciation of locomotive
equipment; depreciation of power equipment; insur-
ance ; experimental engineering and designing ; moving
and re-arranging department; factory supervision;
final inspection ; miscellaneous manufacturing expense ;
power operations; repairs to land improvements; re-
pairs to buildings, fixtures and structures; repairs to
machinery ; repairs to durable tools; repairs to factory
and miscellaneous equipment; repairs to freight car
equipment; repairs to locomotive equipment; repairs
to power equipment; expense of tools; insurance (em-
ployees’ liability and compensation); sweeping and
cleaning; taxes (state, city and county); miscellaneous
services for employees; timekeeping, pay rolls and fac-
tory clerical salaries.’’

As previously stated, some of these elements of burden
are costed direct in the department and others are first
costed for the whole factory and then apportioned among
the departments on arbitrary bases. For the infrequent
occasions when it was necessary to determine the cost of
operations in producing a part, the departmental ratios of
burden to direct labor costs were used to apportion burden
among the operations. Records showing the breakdown of
departmental overhead into its component elements for the

48 Report of Special Master

accounting period have been destroyed, although total de-
partmental overhead figures are available. Permanent ree-
ords have been kept by the defendant of the cost and de-
preciation rate of each machine purchased by it; and there
are scattered records of overhaul and tool costs available.
However, no systematic attempt has been made to compute
individually the cost of repairs, tools, and power consump-
tion attributable to each operation.

Plaintiff and defendant adopt two different methods of
determining overhead savings in this case. Defendant uses
what may be described as the breakdown method of deter-
mining them. It assumes that nearly all of the burden ex-
penses are fixed costs, not affected to any appreciable ex-
tent by a change in machinery for the operation on the
cams. Defendant’s accountants consider the principal vari-
able factors in a comparison of costs on the Walcott lathes
and shapers to be those for depreciation and maintenance
of machinery and tool costs; and their method has been to
reconstruct from the records available the costs of each of
these items on the two types of machines. Their final com-
putation shows a slight advantage to the Walcott lathes on
depreciation, which is more than offset by considerably
greater expense of maintenance and repairs upon them, as

follows;
Cost on Cost on
Shapers _— Melling lathes
Model T shaft
Depreciation $19,248.69 $16,921.58
Maintenance repairs 8,252.10 14,853.80
Extraordinary repairs 23,579.66
$27,500.79 $55,355.04
Loss on Melling lathes $27,854.25
Model A shaft
Depreciation $31,728.94 $27,645.49
Maintenance repairs 25,234.66 45,829.12
$56,963.60 $73,474.61
Loss on Melling lathes $16,511.01
Tractor shaft (Not calculated, but assumed to

follow results with other shafts.)

0
PLAT RAE FEET es parang SIMI PSI CCE EFT TE IY DLT YIM EMAAR OLN HE MN ep “ts

Report of Special Master 49

Defendant’s accountants believe that costs of tools, power,
factory supervision, and costs incident to housing the ma-
chines, which were not computed because of insufficient
records, would have been greater on the Walcott lathes
than with the shapers.

Plaintiff’s accountant, on the other hand, uses the de-
partmental burden percentages based upon direct labor to
compute burden savings. Since these percentages gener-
ally run in excess of 100% for the accounting period, the
burden savings found by his caleulation are somewhat
greater than the savings in direct labor. Plaintiff concedes
that theoretically the breakdown method used by defendant
is the better one, but contends that an accurate computa-
tion cannot be made on that basis because of insufficient
records or other evidence of costs of the individual ele-
ments of overhead liere. According to plaintiff’s account-
ant, Mr. Moise, the kind of overhead costs which remain
unaffected by a change in cam-shaping machinery consti-
tute only an insignificant portion of total overhead. A
large group of items ( particulgrly factory supervision), not
considered in defendant’s accounts, are said to vary gen-
erally in direet proportion to direct labor costs. A third
substantial group of which the most important is machine
depreciation and repairs, are ordinarily affected by a
change of machinery but not necessarily in proportion to,
or in the direction of, direct labor costs. As to the latter
group of costs, however, Mr. Moise believes that in this
case they will average out to vary approximately in direct
proportion to direct labor costs. A computation made by
him of comparative costs with the Waleott lathes and
shapers for Model T and Model A production (assuming
the shapers could have been used on the Model A shaft)
shows savings with the Waleotts of approximately $120,000,
However, he considers, in view of the way defendant has
kept its cost records, that overhead savings should be com-
puted by use of the departmental burden percentages, even
though they result in a smaller figure than that.

In considering the authorities on the proper method of
determining savings of this type, I have found no reported
patent cases where the defendant’s profits were determined,
as here, by the standard of comparison method which dis-
cuss the treatment of overhead savings as such, but con-
sideration is given to overhead, if at all, only in terms of

—— .

_

a

Report of Special Master

its elements. (See, e.g., Morgan Construction Co. v. Forter-
Miller, supra, where plaintiff restricted its claim to savings
arising from a lower cost of labor, and Carson v. American
Smelting Co., supra, where the defendant’s account in-
cluded a comparison of costs of a number of items which in
the Ford system of accounting would be classified as bur-
den, but which were not discussed in terms of burden.)

However, there are a large number of cases dealing
with overhead where the infringement consisted of the
manufacture and sale of a patented thing, rather than its
use. The problem arises when (as is usually the case) the
infringing business accounts for only a small part of the
total business of the defendant, and where part of the over-
head expenditures of the entire business are claimed as a
deduction from gross profits of the infringement. The
situation in those cases is in effect only the converse of that
in the case at bar where the infringement was one of use:
in those cases, the defendant claims a deduction for over-
head expenses increased by infringement, while here the
plaintiff claims as profits decreased by infringement. Con-
sideration of them is therefore pertinent. It is significant
that the claims made by the parties in those cases closely
resemble those in the case at bar, one side contending that
the increase in overhead from infringement was negligible
and should be disregarded, while the other contends that
overhead should be charged to the infringing business on
the same proportion it bears to the whole business,

The general principle established by the decisions on
overhead referred to is that the one claiming the benefit of
overhead expenses must show, and the burden is on him to
do so, what portion of total overhead expenditures were
actually attributable to the infringement. Levin Brothers
v. Davis Manufacturing Co., 72 F. (2d) 163 (C. C. A. 8,
1934); Haiss Manufacturing Co. v. Link-Belt Co., 63 F.
(2d) 479 (C. C. A. 3, 1932); Sheldon v. Metro-Goldwyn Pic-
tures Corp., supra; Krentler-Arnold Hinge Last Co. v.
Leman, 24 F. (2d) 423 (D. C., Mass. 1928); Cf. Horvath
v. McCord, supra. Usually, this involves segregation of
overhead into its constituent elements, accompanied by
proof showing which ones have been increased by infringe-
ment. Levin v. Davis, supra; Standard Mailing Machines
Co. v. Postage Meter Co., 31 F. (2d) 459 (D. C., Mass.,
1929); Horvath v. McCord, supra; Flat Slab v. Turner,

Report of Special Master 51

285 Fed. 257 (C. C. A. 8, 1922). No case requires the in-
fringer to go to the extent of proving every expenditure
for overhead affected by the infringement, as this would be
impossible from a practical standpoint. (See above cases
and remarks of court in Stearns-Roger Manufacturing Co.
v. Ruth, 87 F. (2d) 35 at 41 and 42, C. C. A. 10, 1936.)
Overhead expenditures are rather dealt with under broad
classes, analogous to the elements of Ford overhead set
forth above, and each class is apportioned between the in-
fringing and non-infringing branches of the business on
some recognized accounting basis, such as proportionate
direct labor costs. In cases, however, where it is found
impracticable to separate overhead into its elements and
treat them individually, the apportionment has been made
by dividing all overhead expenses between the infringing
and non-infringing branches on a recognized accounting
basis, usually direct labor for manufacturing overhead.
(See Standard Co. v. Cropp Co., supra, where general over-
head was allocated between departments on the direct labor
wage basis and total departmental overhead was then
divided between the articles worked on in the department
on the same basis; Computing Scale Co. v. Toledo Com-
puting Scale Co., 279 Fed. 648, 657-8, C. C. A, 7, 1921, where
all manufacturing overhead was apportioned on a direct
labor plus materials basis. With administrative and sell-
ing, as distinguished from manufacturing, expense, the
basis of apportionment is usually relative gross sales of
the two branches.) In some cases where the use of an over-
head ratio for the whole business has seemed not to reflect
accurately the actual increase in overhead from infringe-
ment, the courts have arbitrarily reduced the ratio to the
point thought to represent the actual increase. (See, e.g.,
Winchester Arms Co. v. American Buckle and Cartridge
Co., 62 Fed. 278, C. C, Conn., 1894, where the court added
10% to the cost of labor and materials for the infringement
in place of 26-1/5% overhead of the business in general;
Flat Slab v. Turner, supra, pages 278 and 279.)

The courts recognize that there is no perfect method of
apportioning overhead to the infringing business (Stand-
ard v. Cropp, supra; Stearns-Roger v. Ruth, supra), and
accordingly take a practical approach to the problem, using
the best method that the nature of the particular case and
the records available will permit. This is well illustrated

52 Report of Special Master

by Haiss Manufacturing Co. v. Link-Belt Co., supra, where
the defendant infringed by manufacturing and selling
wagon loaders, which constituted a small fraction of its
business. It kept to separate account of the overhead
chargeable to the infringing business, and there was no
evidence under which the elements of its general overhead
could be apportioned. Defendant claimed that a propor-
tionate part of its total overhead should be charged to the
infringing line on the basis of direct labor costs, which
showed a small profit to defendant. The court, being con-
vinced that defendant had made a substantial profit from
infringement, held that defendant had not sustained its
burden of showing overhead expenses were increased by
infringement in proportion to direct labor costs. It did
not, however, leave overhead out of consideration entirely
by awarding plaintiff the defendant’s gross receipts from

infringement minus only material and direct labor costs; :

but instead computed defendant’s profits by taking the
percentage of average clear profit from its entire business
and applying this to the infringing business, thus taking
overhead into account indirectly.

Since the problem of treatment of overhead in the case
of the infringing manufacturer is only the other side of the
problem with the infringing user, the principles above con-
sidered are applicable to the case at bar. In this ease, it
seems clear that from a theoretical standpoint defendant’s
method of computing overhead savings is the most accurate
and the correct one. Overhead expenses do not always vary
with direct labor costs incident to the use of machinery: it
is common knowledge that in modern factories expensive
labor-saving machinery is frequently adopted with which
the great increase in some of the burden costs is more than
compensated by the saving in labor costs. As between dif-
ferent machines available for the same operation, one may
be the least expensive in depreciation cost, another in tool
costs, a third in maintenance, and a fourth in labor. (See,
as an example of this, defendant’s account in Carson v.
American Smelting Co., supra.) Defendant’s system of
apportioning burden among its departments recognizes that
all kinds of burden do not vary in proportion to direct
labor, different bases being used for apportioning the dif-
ferent elements. It is true that it apportioned departmen-
tal burden among operations entirely on a direct labor

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Report of Special Master 53

basis, but for its purposes in doing this a refined method
was not necessary. It would seem that defendant, by the
adoption of an accounting method of distributing burden
among operations for a different purpose, should not neces-
sarily be barred from proving similar costs here by a better
method, if available. On the other hand, it must be recog-
nized that the adoption of a particular system of computing
burden costs by defendant may result in its records being
kept in such a way as to make it impossible to calculate
them by a theoretically more precise method. Furthermore,
it appears that the method of applying manufacturing over-
head on the direct labor basis is generally accepted by ac-
countants as the best one where it is impossible or imprac-
ticable to use a theoretically more accurate system.
Consideration of the problem leads me to the conclu-
sion that, with the records available here, a computation of
comparative overhead costs of the shaper and Walcott ma-
chines on a breakdown basis is going to be deficient in im-
portant respects. In the first place, it will be unsatisfactory
with respect to important elements of overhead which de-
fendant thinks it unnecessary to consider in the compara-
tive cost study, but which would seem reasonably certain
to be greater with the shapers than with the Walcotts. For
example, a very important item of overhead, factory super-
vision, varies in general with the amount of direct labor,
and consequently would be greater with the shapers. While,
as pointed out by Mr. Moise, the addition of a single laborer
in a department might not require an additional foreman,
the point will eventually be reached when it will become
necessary to add one. It would be unfair to charge the
expense of the added foreman to the last productive worker
taken on: it should be apportioned upon an average basis.
If records of the cost of this element of overhead in the
camshaft department were still available, the additional
cost for the shapers could be calculated with reasonable
accuracy: without such records or any reliable basis for
estimation, the cost of this element by itself cannot be com-
puted. The same situation prevails with the similar cost
elements of einployees’ liability and compensation insur-
ance, and timekeeping, pay roll, and clerical salaries.
Another element of overhead costs which would probably
be larger with the shapers, but which was disregarded by

54 Report of Special Master

defendant for lack of records, is that of power. There are
some records indicating the use of a 74% horsepower motor
on the shaper, as compared with a 5 horsepower one with
the Walcotts. Even if the motors were the same, however,
power consumption (which in general varies with the rated
motor power) would be proportional to the time consumed
in the cam-roughing operation, and, in turn, with direct
labor costs. While this element should not be disregarded
if it can be determined, there is no evidence in the record
frum which its cost with the shapers and Walcotts can be
computed as an individual element.

in the second place, as to the three items of overhead
—machine depreciation, machine maintenance and repair,
and cutting tool costs—which defendant admits are ap-
preciably affected by a change from the Walecotts to the
shapers on the cam-roughing operation, it is difficult, if not
impossible, to state a satisfactory account of them as indi-
vidual elements here, in view of the fact that defendant’s
accounting system has not been built around the effort to
ascertain costs by operations, and the records available,
particularly as to maintenance and repairs, are somewhat
scattered. An analysis of these three items indicates, in
my opinion, that they would probably vary in the same
direction (and roughly in the same proportion) as direct
labor costs on the shapers and Walcotts.

In my opinion, there is considerable merit to the criti-
cisms made by Mr. Moise of defendant’s treatment of these
items. I do not feel that its accounts accurately reflect the
actual saving or loss from the use of the Walcotts as com-
pared with the shapers. With respect to depreciation, for
example, defendant finds that, despite a 50% greater cost
of each shaper (an average of $4,100 for the Walcotts as
against $6,000 for the shapers purchased in 1923 and 1924)
and despite the slower speed of the shapers which, other
factors being equal, would mean approximately 50% more
shapers to turn out the same production, depreciation costs
are substantially the same for both. This conclusion is
based primarily on the assumption that 13 shapers would
do the work of 16 Walcotts, because 13 shapers actually
turned out the largest production of automubiles in Ford
history in 1923, while at least 16 Walcotts were always
used for its automotive production. This method of cal-

ee

Report of Special Master 55

culation, however, directly conflicts with that used by de-
fendant in its plant to determine the same thing: its records
of its productive capacity make the rumber of machines
needed for its camshaft production inversely proportioned
to the speeds of the machines. (See Defendant’s Exhibit 247
and Plaintiff’s Exhibit 154D on the main trial, both of which
state that 14.5 Walcott lathes or 21.6 shapers are required
for its production schedule.) Defendant overlooks a variety
of factors which might account for the greater number
of Walcotts being used, beside its assumption that the Wal-
cotts were getting out of order more often: the extent to
which the shapers may have been pressed to get out the 1923
production, the decrease in number of shifts after intro-
duction of the Walcotts, the increasing development of an
automatic conveyor system which would make it necessary
to be certain of a smoother flow of camshafts through the
line of production. It is very significant that in 1923, nine
new shapers were ordered because of the demands of pro-
duction ; and it seems probable that their use had been con-
tinued, a number in excess of twenty would have been kept
available.

With respect to maintenance, defendant’s finding of
substantially higher costs with the Walcott machines is
based on two conclusions: (1) higher ordinary repair costs,
because four maintenance men were employed in the de-
partment on the last two shifts to service the Walcotts as
against only two men for the shapers; and (2) higher ex-
traordinary repair costs for the Walecotts in the form of
fourteen special overhauls in 1928, 1929, and 1930 at a cost
of over $23,000, while the records show only three over-
haul jobs for the shapers. These conclusions, however,
overlook evidence showing that a different system of main-
tenance was followed with the two machines. With both
machines, cleaning and minor repairs were done in the
department. With respect to overhauls, however, each
shaper was removed on an average of once a year to the
main tool room for overhaul; while the Walcotts were taken
apart and reassembled by the maintenance men in the de-
partment, the worn parts only being taken to the foundry
toolroom for replacement or repair. The overhaul cost of
the shapers, being chargeable to another department, was
not computed in defendant’s accounts, and if taken into
consideration would lead to a very different result.

7

56 Report of Special Master

The reason for the special overhauls on the Walcotts
from 1928 to 1930 is somewhat obscure, but it is possible
they were attributable to the changeover to Model A pro-
duction. In this connection, a serious objection to both the
depreciation and maintenance accounts of defendant lies
in their failure to consider the effect of the necessity of re-
modeling the shaper for Model A production. With the
extensive modifications necessary to convert the Model T
shaper into any one of the suggested Model A designs, the
cost of the changeover to Model A production would un-
questionably have been much greater than with the Wal-
cotts: with at least some of the modifications it would have
been necessary to build entirely new machines. Defend-
ant’s accountants, however, do not make allowance for the
development cost of the Model A shaper; nor for the modifi-
cation of the existing machines or the building of new ones;
nor for the increased costs of purchase and maintenance of
the more complicated mechanism. (In fact, defendant’s
depreciation account does not make allowance for increased
costs of machinery around 1929 in valuing shapers added
during Model A production, but instead their cost is figured
at the 1923 rate.) Defendant’s reason for this is not clear,
unless it is proceeding on the theory that the speed of the
shaper could have been stepped up by other changes to
more than offset these costs.

Defendant has not computed cutting tool costs, because
of insufficient records. However, the records which are
available indicate the average original cost of the shaper
tools was approximately four times that of the Walcotts,
and this, together with a much shorter life (see Defendant’s
Exhibit A, Exhibits 8, 9 and 10), more than counterbalances
the greater grinding cost of the Walcott tools, resulting in
a substantial saving with the Walecotts.

Some criticisms could also be made of Moise’s ac-
countants of comparative costs of these three items, but,
since it is not claimed by plaintiff that this method of com-
puting overhead savings should be adopted by the court, I
think it unnecessary to go into them here. Considering the
entire picture, I am inclined to agree with the plaintiff that
there are too many gaps to fill in to state a satisfactory
account of overhead savings by the breakdown method
adopted by defendant. It might be possible to fill in the

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Report of Special Master 57

gaps by estimates, but on this record satisfactory esti-
mates cannot be made of such costs, for example, as those
for factory supervision with the two machines or those in-
curred in the modification of the shaper to adapt it to the
Model A shaft. It would seem unfair, however, to ignore
overhead savings, since it seems reasonably clear that sub-
stantial savings in those costs were realized by defendant
in using the Walcott lathe in place of the shaper on Model
T and A production. While it is recognized that applica-
tion of general ratios of overhead to direct labor costs
would lead to unfair results in many eases, I believe an
analysis of the evidence here indicates that with the shaper
and Walcott machines overhead costs by and large would
vary in proportion to direct labor. While some of the
elements of overhead would vary littie, if at all, these static
costs are offset by some elements (e.g., depreciation and
cutting tool costs) which would probably increase with the
substitution of the shapers for the Walecotts in a greater
proportion than direct labor. I therefore adopt the method
of computing overhead costs for these two machines by
using the departmental percentages. I think this treat-
ment is in line with the cases on the treatment of overhead
in patent accountings, and also with the practice of cost ac-
countants to apportion manufacturing burden on a direct
labor basis where a more precise method is not feasible. It
is to be observed that this method takes into consideration
the increased depreciation and maintenance costs of the
Model A shaper, since the reduction in speed for that form
of shaper increases the overhead costs thus ealeulated, and
since, moreover, the departmental overhead percentages
ran considerably higher for Model A and Model T produc-
tion.

In this connection, the language of Justice Cardozo in
Duplate v. Triplex, 298 U. 8. 448, 468, 80 L. Ed. 1274 (1936),
may be quoted:

“‘But the master has found, and the parties are
agreed, that in a business of this order there is no
method of accounting, not impracticably burdensome,
whereby the costs of operation can be apportioned and
distributed except upon an average basis. At all
events, if such a method was available, the defend-
ants did not use it. They kept their books upon the

58 Report of Special Master

basis of the method they decry, and measured loss or
gain accordingly. Average cost, even if not identical
with actual cost, is the best approximation known to
accountants.”’

Thus far, consideration of the overhead problem has
been limited to the comparison between the shaper and
Walcott machines for Model T and A production. With the
tractor shaft and the grinder as the standard of compari-
son, the situation is somewhat different. Depreciation costs
do not rise with the grinder as compared with the Walcott
in anything like the proportion of direct labor. Since one
man operated two Walcotts but only one grinder, if six
times as much labor were required with the grinder only
three times as many machines would be needed. In addi-
tion, it appears that the machines themselves were only
about half as expensive as the Walcotts. Finally, with the
tractor, defendant was getting into such low production as
to diminish the benefit from labor-saving machinery. Two
Walcott machines, the minimum which could be economi-
cally used, probably provided a greater productive capacity
than was needed for tractor production. Defendant’s ac-
counts indicate that three grinders turned out the large
1923 production, and all three cost only %4 as much as the
two Walcotts which replaced them.

Since other important overhead items, such as repair
costs, would likewise not rise with the grinder as compared
with the Walcott in proportion to direct labor costs, the use
of the burden percentages based on direct labor, in the
absence of countervailing factors, would greatly exaggerate
actual burden savings. However, it is claimed by plaintiff
that the cost of grinding wheels was so great that the bur-
den percentages would most likely underestimate actual
burden savings. There is conflict in the record as to this
cost. In defendant’s statements of account, the cost of a
grinding wheel is stated as $7.50 each and its life is
variously estimated at 65 to 90 hours. Mr. Moise’s com-
putation of grinding wheel costs for the Model A showing
them to be only about 15% of direct labor costs (R. 2500)
is apparently based upon an estimate of defendant in its
Exhibit C (paragraph 10). However, the foreman of the
camshaft department of the Nash Motor Company from
1919 to 1931 testified that their wheels for rough grinding

SON alte ES PRR :

Report of Special Master 59

cams had a life of only fifty six-cylinder camshafts (or ten
hours at five shafts per hour), which alone amounted to
831447% of direct labor costs. If grinding wheels at Ford
had a comparable life (making adjustment for the smaller
number of cams on its shaft), they would each machine 75
tractor shafts, at a cost of 10 cents per shaft or close to
100% of the direct labor cost.

Since the operation appears to have been identical at
both plants, it is difficult to account for this wide dis-
crepancy between Ford and Nash figures, unless some mis-
take has been made in defendant’s account, such as the use
of figures of life of wheels for finish rather than rough
grinding. The Nash figures seem more consistent with the
statement of defendant’s Mr. Wibel on the main trial that
grinding wheels were worn away quickly and were very ex-
pensive. Assuming, therefore, the correctness of the Nash
figures and the existence of some mistake in defendant’s
accounts on this point, I think that, in view of the resultant
heavy cost of grinding wheels, the departmental burden
percentages may be fairly applied to measure burden sav-
ings without reducing them, except for the abnormally high
figure of 674.22% for November, 1926, which I have re-
duced to 200%.

Total direct labor and burden savings from the use of
the Walcott lathes, computed in accordance with the con-
clusions here adopted, are shown on Schedule C attached
to this report and are as follows: Model T, $42,700.76;
Model A, $98,675.15; Tractor, $65,448.31; total for all
shafts, $206,824.22.

(3) Orrser or Loss From Scrapping SHAPERS.

The question may be raised as to whether the un-
recovered cost of the shapers scrapped by defendant after
adoption of the Walcotts and the payment of approximate-
ly $20,000 on new shaper orders cancelled in 1924 should be
offset against the savings found to result from the infring-
ing machines. While defendant raised this point at one
time during the trial, neither party has given any effect to
it in its accounts. No doubt when a company purchases
a new machine, it expects to save enough with it to make
up for any loss in scrapping the one it replaced. If it did
not make such saving, it would feel that it had made a bad

EE a

60 Report of Special Master

investment. However, I know of no case which has con-
sidered this factor in determining profits from the use of
a machine; and it hardly seems proper to say that a scrap
loss on a former machine constitutes a cost of the machine
which replaces it. In this case, moreover, infringement
did not commence until more than a year after the installa-
tion of the Waleotts, by which time eleven of the seventeen
shapers had been scrapped and the $20,000 payment long
since made. It might equally well be argued that since if
defendant had turned to the shapers in 1925 instead of in-
fringing it would have had to dispose of its comparatively
new Walcott machines as well as buy new shapers, the loss
which would have resulted from disposing of the Walcotts
should be added to the cost of using the shapers as a
standard of comparison. Under all the circumstances, I
think it best to follow the method adopted by the parties and
disregard any losses in scrapping machinery used prior to
infringement.

3. APPORTIONMENT oF PROFITS.

Thus far, the inquiry has been restricted to the ques-
tion of the savings resulting to the defendant from the
use of the infringing machines. The question now arises
as to whether the plaintiff is entitled to all of those profits
or whether some of tiem are not attributable to other ele-
ments in the machine beside the plaintiff’s invention, which
plaintiff cannot recover. The defendant claims that the
profits must be apportioned between those attributable to
plaintiff’s invention and those resulting from patented im-
provements incorporated in the infringing machines; and
that, if this is done, it will be found that all of the profits
resulted from the improvements, and that plaintiff can as
a consequence recover none of them. Plaintiff, on the other
hand, claims that the rule of apportionment does not apply
to a ease where (as is claimed to be the situation here)
the plaintiff’s patent is on a unitary device and the claims of

| the patent cover the improvements added by the defendant;
| that it is therefore entitled to all the profits.

The question of apportionment arises in practically
every patent accounting case and is probably the most dif-
ficult one with which the courts must deal. It was recog-
nized early by the Supreme Court in Seymour v. McCor-

Report of Special Master 61

mick, 16 How. 480, 14 L. Ed. 1024 ( 1853), where the plain-
tiff’s patent was for an improved driver’s seat upon a
reaper, that it would be unfair to permit the plaintiff to
recover damages equivalent to those which would have been
assessed if its patent had been upon the entire machine ;
and consequently the court restricted the plaintiff to those
damages it could prove were attributable to the seat im-
provement. The same doctrine was later applied to the
recovery of profits, in connection with which the problem of
apportionment has more frequently arisen. In explain-
ing the basis of the doctrine in Sheldon v. Metro-Goldwyn
Pictures Corp., the Supreme Court said that profits are
awarded to the patentee ‘‘in accordance with the principles
governing equity jurisdiction, not to inflict punishment but
to prevent an unjust enrichment by allowing injured com-
plainants to claim ‘that which, ex acquo et bone, is theirs,
and nothing beyond this’.’”” The patentee is entitled to
reap the full value of his invention, but not that which re-
sults from things outside the scope of his patent. The ques-
tion of apportionment can arise under a variety of dif-
ferent fact situations: the patent involved may be on a ma-
chine, process or article; the infringement may be by sale
or use of the patented thing; and the question may be one
of recovery of profits or of damages. However, it ap-
pears that the same fundamental principles are applied
to each type of case.

In each case involving the question of apportionment
of profits, it is necessary to consider two issues: first,
whether the defendant under the circumstances of the case
has a right to have the profits apportioned ; and, second, if
so, how much of the profits are attributable to plaintiff’s
invention and how much to the other factors upon which
the right to apportionment is based. This case presents a
very close question on the first issue of the right to ap-
portionment. The underlying facts on this issue are rea-
sonably clear, and may be summarized as follows:

1. The Gordon machine itself was impracticable for
machining the Ford camshafts. This is shown by the ex-
perience of Ford and of the International Harvester Com-
pany with the machine, and has been found as a fact by
the Court of Appeals. In plants where the Gordon ma-
chine was successfully employed, it appears that the cams
were of a more blunt-nosed type than those of defendant.

PIKE SPRAY SY EIR IGS LEN: LY MEG OE IES TEEMR EE ta

62 Report of Special Master

2. The Walcott machine had two improvements over
the Gordon machine devised by its designer, Melling, upon
which he obtained patents subsequent to the issue of the
Gordon patent. The change in the method of tilting the
tool, while held by the Court of Appeals to involve merely
the substitution of mechanical equivalents for the means
used by Gordon, was also recognized by the court as a
valuable improvement which might be patentable; and a
patent was later issued to Melling in his machine.

The second patented improvement consisted of a
mechanism for advancing the tools to take a second finish-
ing cut on the cams without removing the shaft from the
machine; whereas, in contrast, some companies using the
Gordon machine put the shaft through a second machine
for a finishing cut. While it appears that devices for au-
tomatically taking two cuts upon a lathe are old, no evi-
dence has been introduced to show that there was not pat-
entable novelty in Melling’s device. Defendant claims
that this improvement, unlike the other one, was wholly out-
side the scope of the Gordon patent. However, it would
seem that the element in Claim 2 of the Gordon patent, as
an example, ‘‘means for simultaneously causing relative
movement between the work holder and tool holder axially
with reiation to the work holder,’’ covers the means for
doing this equally whether one or two cuts are taken.

It seems clear that without these two improvements no
savings would have been realized by the defendant, at
least by comparison with the shaper. In the absence of evi-
dence or argument to the contrary, it must also be assumed
that the patents upon them were valid.

3. On the other hand, the Gordon invention was also
necessary to the functioning of the Walcott lathe in cutting
the cams (assuming, as I have found, that the non-tilting
Walcott lathe is infringing). Without the basic Gordon
idea of oscillating the tools to maintain proper cutting
angles, the Walcott machine would be only an ordinary
lathe.

All through the authorities on apportionment, a dis-
tinctiom is made between cases where the plaintiff’s patent
is for an improvement narrow in scope or covering only a
part of the article on which it was used, and those where the
plaintiff’s patent is a basic one on a complete structure.

at
eet ee fe et ek oe J

> +e 2 Se 0s ele

Tralitsnads

Report of Special Master 63

Egry v. Standard Register Co., 23 F. (2d) 438 (C. C. A. 6,
1928); Yeserba v. Hardesty Manufacturing Co., 166 Fed.
120 (C. C. A. 6, 1908); Stromberg Motor Devices Co. v.
Zenith-Detroit Corp., 73 F. (2d) 62 (C. C. A. 2, 1934);
Herman v. Youngstown Car Manufacturing Co., 216 Fed.
604 (C. C. A. 6, 1914); Cincinnati Car Co. v. New York
Rapid Transit Corp., 66 F. (2d) 592 (C. C. A. 2, 1933) ;
Westinghouse Co. v. Wagner Electric Co., 225 U. S. 604,
56 L. Ed. 1222 (1912); Dowagiac v. Minnesota Plow Co.,
235 U. S. 641, 59 L. Ed. 398 (1915). In the former type of
case, the courts hold the profits must be apportioned be-
tween the contribution of the invention and the unpatented
or prior art features. Examples are the patented driver’s
seat on the harvester (Seymour v. McCormick, supra), and
the patented clamp on a mop (Garretson v. Clark, 111 U.S.
120, 28 L. Ed. 371, 1884). In the cases of the latter type,
it is generally held that the patentee is entitled to all the
profits, unless the infringer has made additions or improve-
ments, in which case under certain conditions in controversy
here an apportionment will be made. See Westinghouse
v. Wagner, supra; Elizabeth v. Pavement Co., 97 U. 8. 142,
24 L. Ed. 1000 (1878); Hurlburt v. Schillinger, 130 U. S.
456, 32 L, Ed. 1011 (1889); Yeserba v. Hardesty, supra;
Stearns-Roger v. Ruth, infra; Stromberg Motor Devices
v. Zenith-Detroit Corp., supra; Dunn Manufacturing Co. v.
Standard Computing Scale Co., 204 Fed. 617 (C. C. A. 6,
1913). As will be seen, the distinction between the two
types of cases is especially important on the question of
burden of proof. The determination of the class into which
a particular case falls is not always an easy matter, there
being no simple decisive test. See Stearns-Roger Manu-
facturing Co. v. Ruth, 87 F. (2d) 35 (C. C. A. 10, 1936).
The classification does not depend upon the language used
by the patentee in his claims, for, as was said by Egry v.
Standard Register Co., supra (p. 440) :

‘“‘He cannot, by the language which his claim hap-
pens to take, transform his invention of an improve-
ment in an existing structure into one of a complete
structure, as if it were wholly new, so as to entitle him
to profits upon those parts of it which are not in any
fair sense his invention.”’

64 Report of Special Master

The test most commonly applied is that of whether if the
patented features are abstracted a complete or workable
article or machine is left, but this test is not universally
applicable. Cincinnati Car Co. v. New York Rapid Transit
Corp., supra; Herman v. Youngstown, supra. However,
in the present case there would seem to be no doubt but that
in view of the holding of the Court of Appeals that the pat-
ent in suit was a pioneer patent upon a machine for turning
cams, the invention is one like that in the Westinghouse
case which permeates the whole device so that the patent
covers the article as a whole. The case consequently falls in
the second class.

With either type of case, where it appears that the
entire market value of the infringing article is attributable
to the patented invention, the patentee is entitled to all the
profits. Crosby Steam Gage & Valve Co. v. Consolidated
Safety Valve Co., 141 U. 8S. 441, 35 L. Ed. 809 (1891);
Elizabeth v. Pavement Co., supra.

A third type of apportionment case which should be
mentioned here is that in which the claim of apportionment
is based not upon changes by the defendant in the thing
patented, but rather upon improvements in machines or
methods of manufacturing a product patented to the plain-
tiff. In such cases, it has been held that even though
the improvements were patented and resulted in substan-
tial savings in cost of production, there is no basis for ap-
portionment. Duplate v. Triplex, supra; Conroy v. Penn-
sylvania Manufacturing Co., 199 Fed. 427 (C. C. A. 3, 1912) ;
Cf. Carborundum Co. v. Electric Smelting & Aluminum Co.,
203 Fed. 976 (C. C. A. 1913). The reason for this rule is
not entirely clear, but the courts treat the case as being
similar to that in which an apportionment based upon sav-
ings in cost of production resulting from the superior skill
of the infringer is denied (Lawther v. Hamilton, 64 Fed.
221, C. C., Wis., 1892).

The question here resolves itself into one of when im-
provements added by defendant to the plaintiff’s patented
article will afford a basis for apportionment. Westing-
house v. Wagner, supra, which undertook to summarize the
law on apportionment and which is the leading case on the
subject, was that type of case. There, the plaintiff had a
combination patent on a transformer containing open

= ST LY al ae

Report of Special Master 65

spaces in the core to cool the mechanism. The defendant
infringed by manufacturing and selling a transformer with
open spaces in the core but with a reorganization of the
elements to include open spaces in the coil and between the
coil and core. The Supreme Court in its opinion stated four
basic rules of apportionment, two of which should be quoted
here.

‘*(e) Where profits are made by the use of an
article patented as an entirety, the infringer is liable
for all the profits unless he can show—and the burden
is on him to show—that a portion of them is the result
of some other thing used by him. Elizabeth v. Pave-
ment Co., 97 U.S. 126.

‘“‘(d) But there are many eases in which the plain-
tiff’s patent is only a part of the machine and creates
only a part of the profits. His invention may have been
used in combination with valuable improvements made,
or other patents appropriated by the infringer, and
each may have jointly, but unequally, contributed to
the profits. In such case, if plaintiff’s patent only
created a part of the profits, he is only entitled to re-
cover that part of the net gains.”

The Supreme Court, accepting the findings of the lower
court that the spaces added by defendant were valuable and
noninfringing improvements (althongh not shown to have
been patented), held that the case was one for apportion-
ment, apparently considering the case as coming under
Rule (d), supra.

Plaintiff claims that the Westinghouse ease is distin-
guishable from the case at bar, because the improvements
here are within the inhibited field of its patent, the prin-
cipal one having been adjudicated infringing. It is claimed
that this falls under Rule (c) rather than Rule (d) of the
Westinghouse case, and that the **some other thing’’ re-
ferred to in Rule (c) means something outside the scope of
the patent claims. It is somewhat difficult to see the dis-
tinction between Rules (ce) and (d) under plaintiff's inter-
pretation, and also to distinguish this case from the West-
inghouse case on their facts. However, the cases can be
distinguished on the basis of the findings of the court in the
Westinghouse case that the improvements were non-

66 Report of Special Master

infringing, while here the improvements were infringing.
The Westinghouse case can be considered to stand for the
rule that when the improvements of defendant contributing
to the profits are non-infringing an apportionment will be
made. The same holding was made in Tuttle v. Claflin, 76
Fed. 227 (C. C. A. 2, 1896), as to a non-patented heating
mechanism added by defendant to the infringing machine.

The issue therefore can be further limited to the ques-
tion of when, if at all, infringing improvements can be a i
basis for apportionment. This, in turn, can be subdivided
into the case of infringing improvements which are them-
selves patented and of those which are non-patented. As
to the latter, the authorities seem clear that there is no
right to apportion: in Clark v. Johnson, 199 Fed. 116 (C.
C. A. 7, 1912), where porcelain was substituted for metal
in a dental spittoon infringing plaintiff’s patent and in é
Tuttle v. Claflin, supra (where a different feeding mecha-
nism was substituted by defendant in an infringing ma-
chine), it was held that the substitution by defendant of
these mechanical equivalents (which it does not appear }
were patented) for the means described in plaintiff’s patent
affords no basis of apportionment, even though the sub-
stitution was largely responsible for the profits.

In the case of the patented improvement which is domi-
nated by the plaintiff’s patent, the law is not so clear. Apart
from its argument based on Rule (c) of the Westinghouse
case, plaintiff relies principally on this issue upon Christen-
sen v. National Brake & Electric Co., 10 F. (2d) 856 (D. C.,
Wis., 1924) ; Flat Slab Co. v. Turner, 285 Fed. 257 (C. C. A.
8, 1922); Tuttle v. Claflin, supra; and Duplate v. Triplex,
supra. The only one of these which seems directly in point
is the Christensen case, where the court held that improve-
ments within the inhibited field of the patent, either as a
whole or respecting any part of the structure, do not con-
stitute a ground for apportionment, even if patented and
no matter how much they promote the commercial favor
of the structure, since the infringer is still exercising the
patentee’s rights. In the Flat Slab and Tuttle cases, cer-
tain alleged improvements were rejected as a basis of ap-
portionment on the ground that they were merely mechani-
cal equivalents of the patented construction. But it does
not appear in either case that the equivalents in question

saan rmeesmenta a a

IRAE rare RecN TINTS cae Ue Up tRmNTE RET HNIC CRM eT ats Lenin

— ee -

Report of Special Master 67

were patented (although the defendant in the Tuttle case
contended that its improvement required invention to pro-
duce) ; so the cases are not precisely in point. The Duplate
case is applied here by analogy, plaintiff claiming that
there is no substantial difference between the case where the
defendant appropriates the plaintiff’s patent bodily but
makes improvements in production processes, and that
where it makes improvements within the scope of the patent
in the patented thing itself.

Defendant, on the other hand, relies principally upon
Mason v. Graham, 90 U. 8. 261, 23 L. Ed. 86 (1875), in sup-
port of its position on this issue. In that case, defendant
sold infringing pickerstaff motions for looms, but made
them according to a pattern of his own devising, which was
patented and which reduced their cost of manufacture. The
court held that the saving in manufacturing cost should be
deducted from the profits. Although this case is rather old
and is rarely cited on the question of apportionment, it
seems to be in point here; and, if followed, requires a deci-
sion in favor of defendant on the issue. Plaintiff contends
that Mason v. Graham was impliedly overruled by the Du-
plate case, supra; but it seems clear that the Mason ease in-
volved an improvement in the patented thing itself rather
than in methods of production of the thing (see lower court
opinion, Fed. Cas. No. 5672), so there is at least a technical
distinction between the two cases. Nor do I follow plain-
tiff’s attempted distinction of this case on the ground that
the infringement there was one of making and selling in-
stead of use: the Westinghouse case was also one where the
infringement was by making and selling. Another case re-
lied on by defendant, Keystone v. Adams, 151 U. S. 139,
38 L. Ed. 103 (1894), does not seem to be in point with re-
spect to anything that was actually decided. Dunn v. Stand-
ard, supra, in this Circuit, however, seems in line with
Mason v. Graham: there, the defendant added a patented
improvement to plaintiff’s machine, which was apparently
covered by the claims of the patent on the latter; but the
court granted apportionment saying that the question of
apportionment could not depend on the largely fortuitous
language of the claims.

Approaching the issue here from the standpoint of
principle, there is to be considered the factor pointed out

iS
. - maresaen oe eae en) a ea

68 Report of Special Master

by defendant that plaintiff could not lawfully have sold the
defendant machines like the infringing ones without obtain-
ing the Melling patent rights; and, further, that if defend-
ant had infringed both Gordon and Melling patents, it
would, under plaintiff’s conception of the law, have been
subjected to a double liability. (Of course, the same point
could be made in a case like the Duplate one, where the
Supreme Court denied an apportionment.) On the other
hand, there is a practical danger in recognizing apportion-
ment in a case of this type, in that it may cause the account-
ing proceeding to go off too far on collateral issues as to
the validity of a variety of improvement patents, since an
infringing improvement which is the subject of an invalid
patent could hardly be a basis for apportionment.

Thus, the authoritative cases seem to point to conflict-
ing conclusions on the issue of the right to apportionment
in this case, although there is perhaps a slight edge on de-
fendant’s side in those most closely in point. While, how-
ever, I have considered the law applicable to that issue at
some length, I do not think that it is necessary here to finally
decide it, since I am of the opinion that whichever way it is
decided will not affect the result. Even if the right of ap-
portionment is recognized, it is still necessary to separate
the profits attributable to plaintiff’s patented invention
from those attributable to defendant’s improvements, and
the question arises whether on this record and under the
law governing burden of proof that can be done.

The question of burden of proof is important on the
issue of separation, because of the frequent impossibility
of showing a reasonable basis of allocating the profits to the
two factors. In recognition of that fact, the law as to bur-
den of proof represents to a large extent a compromise be-
tween the desire of the courts not to turn the patentee down
without any recovery, where it was obvious that the defend-
ant had benefited greatly from appropriation of his inven-
tion, nor to penalize the infringer by charging him with all
the profits when the plaintiff’s invention was responsible
for only a small part of them. In the Westinghouse case,
which considered at great length the rules as to burden of
proof, it was held that once the plaintiff has satisfied the
initial burden of proving infringement and profits from the
sale or use of infringing machines, the burden devolves

IOS LTR ING OE ee OEY SIF TE IN tS eh Bre

Report of Special Master 69

upon the defendant to show that something other than
plaintiff’s invention has contributed the profits. Upon that
showing, the burden returns to plaintiff to make the sepa-
ration between the profits attributable to the invention and
the other thing, unless an apportionment is shown to be
impossible, in which case the burden shifts back to defend-
ant, since his act of commingling the original invention
with the improvements was responsible for the impossi-
bility. The rule is rather unusual, since the ordinary result
of inability of one bearing the burden of proof to carry it
is loss of the issue, while here the shifting of the burden
means that the one on whom the burden rests to make the
apportionment prevails unless the other side produces
countervailing evidence. There is an indication of doubt in
some of the cases as to whether the burden of apportion-
ment in the Westinghouse case was actually imposed on the
patentee at all. See Egry v. Standard Register Co., supra;
Cincinnati Car Co. v. New York Rapid Transit Corp., supra.
The interpretation which has been placed on the I’est-
inghouse case and the later Supreme Court decision in
Dowagiac v. Minnesota, supra, by the Court of Appeals of
this and the Second Circuit, seems to be that in cases where
the plaintiff’s patent is for an improvement the burden of
allocating the profits between the invention and the other
features is on the plaintiff; in cases where the patent is
upon an entire article, it ison defendant. Egry v. Standard
Register Co., supra; Cincinnati Car Co. v. New York Rapid
Transit Corp., supra; Stromberg Motor Devices Co. v.
Zenith-Detroit Corp., supra; Columbia Machine Corp. v.
Adriance Machine Works, 79 F. (2a) 16 (C. C. A. 2, 1935) ;
Christensen v. National Brake & Electric Co., supra (D. C.,
Wis.). (Cf. Flat Slab Co. v. Turner, supra, where the bur-
den of separation was placed on the infringer as to one of
his alleged improvements; and Standard Co. v. Cropp Co.,
6 F. (2d) 447, C. C. A. 7, 1925, and Levin v. Davis, supra,
where the burden was put on the infringer after impossi-
bility of apportionment had been shown.) Under these au-
thorities, the burden of separation in this case is upon the
infringer; and under any of the authorities it is upon the
infringer where impossibility of apportionment appears.
The plaintiff submitted no evidence to separate the re-
spective contribution of the two patents, relying upon its

70 Report of Special Master

legal contention that the doctrine of apportionment is not
applicable here. Defendant’s evidence on the issue con-
sisted almost wholly of expert testimony that, since the
Gordon machine was not operable on the Ford camshaft,
100% of the value of the infringing machine to defendant
was attributable to the Melling improvements. This does
not seem to me to be a sound conclusion. The reasoning
would lead to the result that if the defendant had infringed
the Melling as well as the Gordon patents, it would not be
liable to either patentee, since in each case it could say that
the infringed invention without the other was worthless.
Liability would thus be defeated where the union of two
inventions was necessary to the making of profits; yet,
apart from infringement, defendant could not accomplish
that end, since it would have to pay both patent owners for
the rights to the machine. The error in this reasoning is
that it confuses the whole with one of its parts; it evades
the problem, as expressed in the Cincinnati Car case, supra
(p. 594), ‘‘quantitatively to allocate the joint product of
two factors, each a condition to the result.’’

Is there, then, any method by which an apportionment
can be made on this record? The cases recognize the diffi-
culty of making an exact apportionment, and hold that
mathematical exactitude is not required but a division based
upon the structural relationship between the patented parts
and the nonpatented parts or improvements, or upon some
other logical basis giving a reasonable approximation, can
be made. Westinghouse case, supra; Dowagiac case, supra;
and other cases. However, we do not have here any ‘‘help-
ful opinion’’ as referred to in Herman v. Youngstown,
supra (p. 608), to aid the court in making the apportion-
ment. The only possible way that an apportionment can
be made on this record is for the court to make an arbitrary
apportionment based upon its own judgment: to say, for
example, that since the Gordon patent was the basic one,
and since Gordon could (and did) carry on a business with-
out Walcott, while Walcott could not do so without Gordon,
two-thirds of the profits should be attributed to the Gordon
invention and one-third to the Melling improvements. A
solution of this sort was reached in Wetherill v. Parsaic
Zinc Co., Fed. Cas. No. 17,464; but, while this might seem a
practical result, I do not think it meets the requirements of

f
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Report of Special Master 71

most of the cases for proof of apportionment. The situa-
tion here is similar to that in Egry v. Standard Register
Co., supra, in this circuit, where the court held that the
record showed no reasonable basis of apportionment. The
Egry case was of the type involving an improvement patent,
so that the plaintiff was not permitted to recover any
profits. This case is of the other type, and the impossibility
of separating the profits sufficiently appears to impose the
burden on defendant. Resorting to the books of the de-
fendant would be of no assistance on the issue; the con-
fusion is not related to the books at all. Consequently I
conclude that the plaintiff is entitled to all the profits; as
between that alternative and allowing the plaintiff none,
that is the fairer result.

V. DAMAGES: REASONABLE ROYALTY.

Under the Patent Act, the plaintiff is entitled to
recover damages as well as profits in an equity case.
Plaintiff cannot recover here on the basis of lost profits,
which is the primary method of measuring damages. There
was no proof of lost sales here. The question therefore be-
comes one of determining a reasonable royalty, which the
order of reference directs me to compute. This basis of
damages has been increasingly used in recent years, since
it is usually not possible to prove lost profits with the de-
gree of certainty required by the courts and, since there is
often no established royalty, an alternative basis of dam-
ages.

The reasonable royalty rule was developed by the
courts as a means of compensating the patentee, where
damages or profits could not be satisfactorily proved by
other methods; and was subsequently incorporated in the
Patent Act (35 U.S. C. A. See. 70). The principles which
govern the determination of a reasonable royalty should be
reviewed at the outset.

The courts have substantially agreed upon the defini-
tion of a reasonable royalty as being that payment for a
license for the patent which would have been agreed upon
at the time of infringement by reasonably prudent men in
the position of plaintiff and defendant, acting without com-
pulsion and assuming the patent to be valid. Reynolds v.
L. A. Young, 101 F, (2d) 257, 261 (C. C. A. 6, 1939) ;

QE PVTRAE IAI

72 ° Report of Special Master

Goodyear v. Overman, 95 F. (2d) 978, 984 (C. % A. 6,
1937); Egry v. Standard, supra, and many other cases.
The evidence which may be considered in fixing a reason-
able royalty is quite diversified. Primarily, the evidence
to be considered is that of ‘‘the nature of the invention, its
utility and advantages, and the extent of the use involved.’’
Dowagiac v. Minnesota, supra; ef. General Motors v.
Blackmore, 53 F. (2d) 725, 729 (C. C. A. 6, 1931), and
Horvath v. McCord, supra, page 335. The opinion testi-
mony of experts is always admissible, as well as evidence of
business practice and royalties in related fields. U. S.
Frumentum v. Lauhoff, 216 Fed. 610 (C. C. A. 6, 1914).
Isolated royalty contracts made by the patentee with others
for the rights to the invention are admissible, although the
court will weigh the circumstances under which they were
made and the reasonable royalty assessed may be more or
less than that provided in such contracts, the infringer not
being entitled to the depressed rate to which the patentee
may have been driven by open defiance of his patent. Gen-
eral Motors v. Blackmore, supra; Horvath v. McCord,
supra; Dunkley v. Central California Canneries, supra;
Austin-Western Co. v. Dise Co., 291 Fed. 301 (C. C. A. 8,
1923). The amount of profits, or lack of them, realized by
defendant from infringement is material; but the mere fact
that no profits have been made does not prevent the award
of a reasonable royalty. National Tube v. Mark, supra;
Reynolds v. Young, supra; Dunkley v. California Can-
neries, supra; Malleable Iron Range v. Lee, 263 Fed. 896
(C. C. A. 7, 1920). It is the expectable profit at the time
the suppositious royalty contract was made, rather than
the actual profit, which is important.

The royalty should be fixed at such figure as to leave
room for an expected manufacturing profit in the licensee.
Rockwood v. General Fire Extinguisher Co., 37 F. (2d) 62,
66 (C. C. A. 2, 1930) ; Consolidated Rubber Co. v. Diamond
Rubber Co., 226 Fed. 455, affirmed 232 Fed. 475 (D. C.,
N. Y., 1916). With this method of fixing damages, it is
unnecessary to show that the sales or purchases made by
defendant would have been made by plaintiff if there had
been no infringement. Consolidated Rubber Co. v. Dia-
mond Rubber Co., supra; Dunkley v. California Camneries,
supra. The reasonable royalty method applied to cases

Sat a a a

'
4

. an 5

Report of Special Master 73

where the infringement has been one of use, as well as
where it was one of sale of the patented thing, although
the measure of royalty will usually differ in the two types
of cases. Horvath v. McCord, supra; Dunkley v. California
Camneries, supra; Gear-Grinding Machine Co. v. Stude-
baker Corp., 4 F. (2d) 510 (C. C. A. 6, 1925); Muther v.
United Shoe Machinery Co., 21 F. (2d) 773 (D. C., Mass.,
1927). It has been said that a reasonable royalty should be
computed upon a conservative basis, and that it should not
be so high as to induce patentees to countenance infringe-
ment nor so low as to encourage infringement. Con-
solidated Rubber v. Diamond Rubber, supra.

In the case at bar, the plaintiff claims that it has suf-
fered damages of various kinds from the defendant’s in-
fringement, which, however, cannot be calculated with rea-
sonable certainty; and that the evidence supports the
award to it of a royalty of at least six cents per camshaft
turned on the infringing machines. Defendant, on the
other hand, claims that the statutory conditions to the award
of a reasonable royalty are not satisfied here; that if any
royalty can be allowed it cannot be based upon the produc-
tion of the infringing machines; that a royalty of ten per
cent of the selling price of the Gordon machine was estab-
lished by the plaintiff, which precludes the assessment of a
different reasonable royalty, but that even the established
ten per cent royalty can be collected only from the manu-
facturer and not from a user of the infringing machines.
I will consider the issues arising from these claims in
order.

A. CONDITIONS TO ASSESSMENT OF
REASONABLE ROYALTY.

Defendant contends that under the statute a reason-
able royalty can be assessed only when neither profits nor
damages can be caleulated with reasonable certainty, and
that since both sides agree that profits can here be eal-
culated with reasonable certainty, there is no occasion for
resorting to the royalty method of compensation. There
was a holding to that effect in the case of Krentler-Arnold
Co. v. Leman, 24 F. (2d) 423 (D. C., Mass., 1928). How-
ever, it is clearly not the law in this Circuit, as is seen from
the case of Goodyear v. Overman, 95 F. (2) 978 (C. C. A.

74 Report of Special Master

6, 1937), where the court found the profits of the defend-
ant to be $29,221.97, and yet held that if the defendant
desired a reasonable royalty the case would be remanded
for further proceedings to determine it. In several cases,
cited above, the courts have found the profits of defendant
from infringement to be clearly zero; and yet despite the
reasonable certainty in their calculation have made an
award of a reasonable royalty. The statute is worded in
the alternative, so that if either damages or profits cannot
be caleulated with reasonable certainty, the court can order
the payment of a reasonable sum as profits or general dam-
ages.

The second ground on which defendant claims the con-
ditions to the award of a reasonable royalty have not been
satisfied is that the existence of damages to the plaintiff or
unjust enrichment of the defendant—a statutory condition
as well as a requirement of the case law on reasonable
property—has not been shown. Defendant claims that its
infringement caused no damage to plaintiff because it was
not in competition with the Gordon Company and it would
not have bought the latter’s machines, even if it had not
infringed, since they were inoperable to cut its cams. How-
ever, it does not follow that because the Gordon machine in
its patented form would not have been purchased by Ford
that plaintiff has suffered no damage. There is no reason
to suppose that if defendant and others had not infringed
plaintiff’s patent the plaintiff and the Walcott Company
would not have reached an agreement under which the
cam-turning lathes with the Walcott improvements would
have been supplied to the trade, with each company shar-
ing in the proceeds. Since the plaintiff’s pioneer patent
was primarily responsible for the value of the Walcott
machine, the probability exists that defendant’s infringe-
ment caused substantial damage to plaintiff, which, how-
ever, it is obviously impossible to gauge with accuracy.
Thus, not only unjust enrichment by defendant, which has
already been found, but the probability of substantial dam-
ages exists here.

B. AMOUNT OF ROYALTY.

I come then directly to the question of the amount at
which the royalty should be fixed. The facts as to the
nature, utility, and advantages of the plaintiff’s invention

roa HESS NS TNE AIAN LDS LOSI EE PENELOPE AN
TRS Tae teen ape - ? ;

eS eee. ~

Report of Special Master 75

and the extent of use by the defendant, and as to the sav-
ings realized by defendant by its infringement need not be
repeated here. The plaintiff sold its machines for an out-
right cash consideration and neither it nor the Walcott
Company attempted to collect a royalty on products from
the purchasers. On each machine sold by plaintiff, the
plaintiff paid to Gordon’s company, the Production Ma-
chine Tool Company, a royalty of 10% of the purchase
price. The specific evidence submitted on the question of
reasonable royalty centers largely around settlement
agreements entered into in 1929 and 1930 between the
plaintiff and certain infringers. After the decision of the
Circuit Court of Appeals in 1929 in the Walcott case in its
favor, the plaintiff made an offer to practically every au-
tomotive company (including defendant) to release all
claims against infringers on the basis of 34 of a cent per
cam turned on the infringing machines for past produc-
tion, and $4,000 per machine for future production. Pur-
suant to this proposal, contracts were made with plaintiff
by the White and Case Motor Companies for an amount
equal to %4 of a cent per cam (a total of $2,465.92 being
paid by White and $1,055.28 by Case). At about the same
time, separate contracts were entered into with plaintiff by
White and Case, and also by the Chrysler and Nash com-
panies, for licenses for future production on their in-
fringing machines, at the rate of $2,000 for each machine
used on four cylinder shafts and $3,000 for each machine
used on six cylinder shafts. The total amount paid by all
four companies for a release of the Gordon patent rights
for the future was $66,000. However, in 1930, a settlement
was negotiated by the General Motors Company on be-
half of all members of the National Automobile Chamber
of Commerce for a complete release of the plaintiff’s claims
for past and future infringement against all members,
which superseded the previous settlements. In this deal,
General Motors paid the plaintiff the sum of $195,000 (as
against an original request by plaintiff for $1,250,000), in
addition to the sums already paid by other companies,
which the plaintiff was allowed to retain, making a total of
$264,521.20. It appears that the General Motors payment
was a lump sum settlement and not based upon production
of cams; but the settlement price was subsequently appor-
tioned among the various members of the Chamber of Com-

76 Report of Special Master

merce on the basis of their production of cams on the in-
fringing machines. In this apportionment, refunds were
made to the White and Case Companies for the amount
paid by them in excess of their share, the amount repaid
to the White Company being $3,705.92. The records which
the witness from the General Motors Corporation had with
him indicated that approximately 160,000,000 cams had
been turned upon machines of infringers involved in the
settlement, which makes the payment average approxi-
mately 1/7 of a cent per cam for past infringement alone,
and considerably less if future production on the machines
is considered.

Additional evidence submitted by plaintiff on this
question includes testimony of production engineers of the
White and Nash automobile companies that each company
saved approximately thirty cents per shaft by the use of
the Walcott machines in place of the old grinding method
(the Nash shaft, however, having twelve cams), and the
testimony of the White witness that the company paid a
royalty of ten cents per shaft for machinery for grinding
spline shafts with savings approximately the same as with
the Walcott machines, and that in his opinion ten cents a
shaft would be a fair royalty for the use of the latter.

Specifie evidence submitted by defendant on the ques-
tion of reasonable royalty was confined largely to the tes-
timony of two witnesses familiar with sales practices in the
machine tool industry that to their knowledge no production
machine was ever sold in that industry on the basis of
payment of a certain amount per piece for work produced
upon it. The testimony of Brush that the Gordon invention
was of no value to Ford was also submitted as evidence
that no substantial payment for the use of the invention
could be reasonable.

The most critical question in determining a reason-
able royalty here relates to the basis to be adopted in fixing
it. While it has been said that in fixing such a royalty the
basis is not important if the amount is fair (Motor Player
Corp. v. Piano Motors Corp., 19 F. (2d) 993, 996, D. C.,
N. J., 1927), it seems obvious here, in view of the tremen-
dous production of the defendant, that a royalty based
upon production will probably result in a much greater
recovery than a royalty based upon an outright payment

IEP SRR es Be ers NIH os

|
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Report of Special Master 77

for each machine or a percentage of the selling price.
There is comparatively little general discussion in the
cases concerning the base to be used in fixing reasonable
royalties, each case being dealt with by the courts on its
own facts. An examination of the many cases dealing with
royalty payments for patent rights (collected in Zabel, The
Patent Royalty Contract) discloses that practically every
conceivable basis has been used at one time or another in
royalty contracts. This is not surprising, since the
problem will vary with the type of patent involved, its
economic importance, the use to which the licensee intends
to put it, and many other factors, and since, moreover, in
like situations reasonable men will differ as to the base to
be used.
The problem of fixing a royalty for the manufacture
nd sale of a patented thing must be distinguished from
that where a machine or process is involved. With the
former, it seems to be most common to set the royalty on the
vasis of a fixed amount for each articulation of the patent
or a fixed percentage of the selling price or manufacturing
cost. Reynolds Spring Co. v. L. A. Young Industries, 101
F. (2d) 257 (C. C. A. 6, 1929); Clark v. Schieble, 248 Fed.
276 (C. C. A. 6, 1917); Godwin v. International Steel Tie
Co., 29 F. (2d) 476; Motor Player Corp. v. Piano Motor
Corp., supra. Where the infringement has involved the
use of a patented machine, royalties have frequently been
assessed on the basis of production on the machine. Gear
Grinding Machine Co. v. Studebaker Corp., 4 F. (2d)
910 (C. C. A. 6, 1925); Dunkley v. California Canneries,
supra. (See also Empire v. DeLaski, supra, and Paper-Bag
Machine cases, 105 U. S. 766, 26 L. Ed. 959, 1882, which
were cases of established royalties; and Muther v. United
Shoe Machinery Co., 21 F. (2d) 773, D. C., Mass., 1927.)
This is not surprising, since the benefit to the user of pat-
ented machinery lies in its saving in production costs, and
if the saving is great enough and the machine cannot other-
wise be obtained, the user will find it to his advantage to
pay a royalty based upon output. However, royalties for
the use of machines have been fixed on many other bases,
including periods of time (see Burr v. Duryee, 68 U.S. 531,
17 L. Ed. 650, 1863, and Diamond Stone Sawing Machine
Co. v. Brown, 155 Fed. 753, C. C., N. Y., 1907, established

78 Report of Special Master

royalty cases), and a lump sum payment (National Tube v.
Mark, supra).

The chief evidence in support of the production base
for the reasonable royalty in this case is that of the settle-
ment contracts negotiated by plaintiff with various auto-
motive companies, chiefly White and Case. This leads to
the question of the competence of this evidence to show
such royalty. This question was considered in Rude v.
Westcott, 130 U. S. 152, 164, 32 L. Ed. 888 (1889), where
the Supreme Court rejected, as proof of an established
royalty, evidence of contracts in settlement of past infringe-
ment, the Court saying:

**It is clear that a payment of any sum in settlement
of a claim for an alleged infringement cannot be taken
as a standard to measure the value of the improve-
ments patented, in determining the damages sustained '
by the owners of the patent in other cases of infringe-
ment. Many considerations other than the value of the
improvements patented may induce the payment in
such cases. The avoidance of the risk and expense of
litigation will always be a potential motive for a settle-
ment.”’

a - tr ae =m —

~

While this decision antedates the development of the rea-
sonable royalty doctrine, the same ruling was made by the
Court of Appeals of this Cireuit in General Motors Corp.
v. Blackmore, 53 F. (2d) 725, 729 (1931). A good argu-
ment has been made in favor of the admissibility of such
evidence, Cincinnati Car Co. v. New York Rapid Transit
Corp., supra; and in Gear Grinding v. Studebaker, supra,
in this Cireuit, royalty contracts based in part upon settle-
ment were considered in fixing a reasonable royalty. How-
ever, under the Blackmore case, supra, the law is estab-
lished in this Cireuit that contracts in settlement of a past
infringement alone are not competent to prove a reason-
able royalty. (To the same effect, see Dunkley v. California
Canneries, supra.)

There is, however, one group of settlement contracts
between plaintiff and alleged infringers in 1929 and 1930
which does not come within the prohibition of Rude v.
Westcott: namely, the contracts for the Gordon patent
rights for future use of the Walcott machines. Since the
paying parties to those contracts had the same free choice

fe
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GEOINT Ni MERA PEA OEY EERIE LE IOS UE EO LT A EN

a RAT Ea ER ION ENT SIRI TOR OTM SINE STA

BP ASAT SRG RARE Se IEE RS TIED CORSON TE Se

Report of Special Master 79

as any licensee to pay royalties or refrain from using the
machines and incur no liability to the patentee, the factors
which have caused the courts to exclude contracts in settle-
ment of past infringement are not present in the case of the
contracts for the future. While the facts that refunds
were later made to some of the parties to those contracts
and that the contracts contained provisions barring their
use in future litigation between the parties may affect the
weight to be accorded them, the fact remains that the pay-
ments stipulated were made in the first instance and they
consequently have some bearing on the question of reason-
able royalty.

In view of the fact that the plaintiff never attempted
to sell its machines for a royalty based upon output and that
even in 1929 after its manufacturing activity had heen ter-
minated it did not attempt to collect such royalties for
future use of infringing machines, and in view of the evi-
dence indicating that it is not the usual practice in the
machine tool and automotive industries to sell production
machinery on that basis, I reach the conclusion that a rea-
sonable royalty should not be assessed here on the basis of
production. It seems evident that, apart from litigation, a
production royalty would never have been asked for by
plaintiff or paid by defendant. The case is different from
Gear Grinding v. Studebaker, supra, and Horvath v. Mc-
Cord, supra, where, so far as appears from the opinions of
the court, the patentee did not sell the machine outright but
licensed it only for royalties based on production. On the
other hand, I cannot accede to defendant’s contention that
ten per cent of the sales price of the infringing machines is
the limit of plaintiff’s royalties. Apart from the objection
that two infringers should not be able to determine the
royalty of a patentee by setting a selling price between
themselves, the ten per cent royalty payments were made
by plaintiff to another and not to the plaintiff by purchasers
of its machines. Moreover, they were made in the early
years when plaintiff was building up a business in the pat-
ented machine, and since Gordon had the chief financial in-
terest in the paying company they amounted in a large
measure to a transfer of money from one pocket to another.
They are therefore not a conclusive guide to a reasonable
royalty to be paid to plaintiff for a release of its patent
rights by a user of infringing machines.

Wor

80 Report of Special Master

; [
In Horvath v. McCord, supra, the Court said: |
)

‘“‘In every case, the court should sift the evidence
and place its determination of reasonable royalties on
something tangible if it can be found in the record in
order to avoid an arbitrary conclusion.”

Mathematical exactitude in fixing a royalty, however, is
recognized as impossible to attain and is not required.
Malleable Iron Range Co. v. Lee, 263 Fed. 896, 898 (C. C.
A. 7, 1920). The record here shows that plaintiff requested
$4,000 per machine, and Chrysler, Nash, White, and Case ’
paid $2,000 to $3,000 per machine (depending on the num-
ber of cams in the shaft to be turned) for a release of the
Gordon patent rights after 1929 and 1930, when the most
valuable years of the patent had expired. It must be recog-
nized that defendant had been using a much better machine
than the other automotive companies before the adoption of
the Walcotts; on the other hand, the difficulty in using that
machine for Model A production can be considered in fixing
a royalty in 1925 as something which potentially might hap-
pen (see Egry v. Standard, supra, p. 443). Furthermore,
defendant’s larger production, while it made it practical for
it to build special production machinery, also made labor-
saving machinery of relatively more value to it than to the
others. Considering that most of defendant’s Walcott
lathes were in use for nearly five years between the issuance
of the patent and the said royalty contracts for the future,
I think that $5,000 per machine represents a reasonable
royalty for a license of the plaintiff’s patent for the use of
said machines. I find, as a conclusion of fact, that the plain-
tiff and defendant (or reasonably prudent men in their posi-
tion) would have come to an agreement to pay the said
amounts at the time if defendant had recognized the Walcott
machines as infringing the plaintiff’s patent. The total
reasonable royalty thus found for all twenty-four infring-
ing machines amounts to $120,000.

LEME UEI ITN SEE IAT SMNLLEN TGA POMP L ARI COLL RE DS MEM TI ENS MEE EES REIT LR

bc ll be ee Lh

Report of Special Master 81

VI. QUESTIONS OF CLEAN HANDS AND OF IN-
CREASE OF RECOVERY.

A. CLEAN HANDS.

It is now necessary to consider two issues involving
the conduct of both parties in connection with the use of
the infringing machines and the effort by plaintiff to re-
cover for the infringement. The first concerns the claim
of defendant that plaintiff has not come into this court
with clean hands and that it is consequently barred from
any relief. While a large part of the briefs has been de-
voted to this issue, lengthy discussion of it in my opinion
is unnecessary. The claim in essence is that plaintiff, find-
ing itself unable to make money out of the manufacture
of its machines, has attempted to make it out of litigation;
and in doing so has pursued a course of conduct which would
be condemned by all fair-minded men, and which culminated
in an act of bribery of a potential witness to keep him from
testifying. Apart from the latter, the specific charges of
improper conduct made by defendant can be summarized
as follows:

1. Plaintiff, with full knowledge of defendant’s use of
the Walcott lathes, failed to give it notice of infringement,
but instead wanted the defendant to infringe.

2. After the decision of the Court of Appeals in the
Walcott case, plaintiff, realizing that it could recover only
a relatively small royalty from the Walcott Company and
that such recovery would result in the machines purchased
from that company being fully licensed, entered into a con-
sent decree awarding it nominal damages, in order to be
able to prosecute its claims against defendant and other
infringing users. Plaintiff thereafter picked on small in-
fringers to get settlement contracts at a high per cam rate
which it could use to secure heavy royalties from the large
infringers.

3. Plaintiff has submitted evidence in this and previ-
ous lawsuits which was intentionally misleading, in par-
ticular testimony of Gordon in the Walcott case that grind-
ing was the universal method of roughing cams prior to his
invention, the introduction of the White and Case contracts
without disclosure of the refunds, and the testimony of
Gordon in this case as to a purported interview with de-

y AOE Pa RS OE RNS Bre PAT ALE RAN MEE IRN PSE TG bo APN TERS My tee PORE ee earn
a a OT EL TS Yo ' os

82 Report of Special Master

fendant’s Mr. Wibel in regard to notice of infringement,
and his testimony with respect to Westinghouse blueprints.

Defendant relies upon no specific cases in connection
with these charges, but on the general doctrine of clean
hands. Much of the charges, if true, are directed at the
plaintiff’s strategy in enforcing its rights under the Patent
Act, which, even if not in accord with the highest ethical
principles, is of doubtful validity as a defense to infringe-
ment. (See Columbia Motor Car Co. v. Duerr & Co., 184 Fed.
893 (C. C. A. 2, 1911).)

However, I think the charges of defendant reflecting
on plaintiff’s conduct are exaggerated. It is unnecessary
to analyze the evidence on each of defendant’s charges in
detail. However, by and large, the plaintiff has taken the
normal course in enforcing its patent rights. It first sued
the manufacturer of the infringing machines, and after get-
ting a decree against it sued the user of the machines.
There is no evidence here to establish that the decree for
nominal damages in the Walcott case was not based upon
the financial condition of the Walcott Company, as recited
in the decree. Since, according to defendant, the National
Automobile Chamber of Commerce had taken over the de-
fense of that suit, it is difficult to see why it did not object
to the decree if its effect was to penalize unjustly its mem-
bers who used the infringing machines; but there is no
evidence here of such objection. After the Walcott decree,
plaintiff extended the same settlement terms to all in-
fringers, although it is true that the White and Case com-
panies were the only ones to settle at the 34 cent per cam
rate. While the evidence here fails to establish actual notice
of infringement to defendant prior to 1929, it shows that
plaintiff made an attempt to give notice to infringers in
1925 but was unable to prove to which companies it actually
sent the notices. With respect to Gordon’s testimony, it
may be that he was sometimes mistaken and sometimes
affected by self-interest, but on the whole he was fair and
candid; and he readily conceded advantages in the Walcott
machine over his own. Therefore, even if a defense based
on these claims of defendant can be raised at this time, I
find and conclude that the defense is not substantiated by
the evidence.

The more serious charge of purchase by plaintiff of
the secrecy of a potential witness—one Laughlin—remains

— ~

Report of Special Master 83

to be considered. The evidence relied upon by defendant
in support of this charge can be summarized as follows:
Laughlin, who was employed by the General Motors Cor-
poration as a patent investigator in connection with the
Gordon suit against it, obtained information and physical
evidence with respect to the Stoddard-Dayton machine
(claimed by defendant here as an anticipation of the Gor-
don invention), which he communicated to counsel for Gen-
eral Motors. After settlement of the General Motors suit,
during the negotiations for which the Stoddard-Dayton de-
fense was brought to plaintiff’s attention, plaintiff retained
Laughlin, paying him a total of more than $2,700. The
initial payment of $1,000 was made on November 18, 1930,
the same day on which plaintiff telegraphed defendant in-
viting settlement. In the main trial in this case, the wit-
ness Rupple testified that a brown paper drawing of the
Stoddard-Dayton machine had disappeared from the files
of his company. Rupple further stated that he had talked
with Laughlin in regard to the machine and had delivered
to him a cam machined upon it, which he had not seen
thereafter. On the accounting, Gordon was questioned by
defendant’s counsel as to why Laughlin was hired, but
received generally indefinite answers, although Gordon did
state that Laughlin told him about the Stoddard-Dayton
defense. Defendant claims that the only fair inference
from this evidence is that Laughlin was retained by plain-
tiff to suppress the evidence he had obtained concerning
the Stoddard-Dayton machine, and that, under Keystone
Driller Co. v. General Excavator Co., 290 U. S. 240, 78
L. Ed. 293 (1933), plaintiff is barred from recovery.

In the Keystone case, it appeared that in a prior suit
involving the patent the plaintiff had paid one Clutter to
keep secret the details of a prior use by him. The Court
held that this conduct barred recovery under the doctrine
of clean hands, regardless of whether the prior use con-
stituted a good defense. From the Keystone case it is
clear that if plaintiff hired Laughlin with the understand-
ing that he would suppress evidence concerning the Stod-
dard-Dayton machine, it should be barred from recovery
here; and Goodyear v. Overman, 95 F. (2d) 978 (C. C. A.
6, 1938), does not change this conclusion. However, as with
all charges of fraud, the evidence to sustain this charge

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88 Report of Special Master

on the part of plaintiff and its attorneys; and in other
respects. Plaintiff shows that this litigation has been ex-
pensive to it, a total of $19,463.70 having been spent upon
it until close to the end of its case on the accounting, which
sum does not include counsel fees. It is contended by
plaintiff that if defendant’s conduct does not constitute
willful infringement, no conduct ever does.

The most important question concerns the good faith
of defendant in continuing infringement after 1929 and in
compelling the plaintiff to relitigate the question of in-
fringement, since, in my opinion, an increase of damages
here, if granted at all, must be predicated upon such con-
duct. This is the very question which was previously
passed upon by Your Honor. The facts relevant to that
question, as developed in both the main trial and the
accounting, should here be reviewed.

Defendant bought the first eighteen infringing ma-
chines before plaintiff’s patent issued, and no knowledge of
the claim of infringement has been shown until after the
Court of Appeals decision in the Walcott case on April 12,
1929. When defendant received the notice of infringement
on June 13, 1929, it had twenty-one Walcott lathes turning
out its camshaft production. All of its camshaft shapers
had been scrapped some time before. Defendant’s first
action was to contact the Walcott Company which had guar-
anteed it against patent infringement, and which stated it
was trying to work out a deal under which it would take
over the Gordon patent. These negotiations continued
through November, 1929, when they collapsed. In the mean-
time, defendant took steps to find a non-infringing substi-
tute to replace the Waleott machines. With this in mind,
it investigated the new Walcott heads about J uly, 1929, but
concluded they were infringing. About two months later,
Pioch conceived his idea of a milling machine, and in Oc-
tober began experimenting with a single cutter. It was
decided to build such a machine, and designs were drawn
up and the machine ordered March 20, 1930, it being placed
on the production line on May 13, 1930, This machine prov-
ing successful, five more were ordered on August 26, 1930,
and installed between December 1930 and February 4, 1931.
The last Waleotts were finally removed from cam produc-
tion on March 16, 1931, nearly two years after the Court
of Appeals decisions. No consideration was given by de-

MET PINS IETSN / 1M MTC

Report of Special Master 89

fendant at any time to a return to the shapers, although,
according to Pioch (D. A. R. 1152-1153), it would not have
been necessary to build an initial experimental machine as
with the Pioch but an entire battery could have been ordered
at once. According to a statement of defendant’s counsel,
this was because defendant decided that since it had to shift
to a new machine it would build one that would surpass all
previous types; while Pioch states it never occurred to
him to go back to the shaper.

During this period, defendant made no overtures to
pay the plaintiff for the use of its patent. At first, it was
advised by its attorney Halbert that the consensus of legal
opinion was that the Gordon patent would be sustained in
future litigation. Defendant was excluded at plaintiff ’s
insistence from the General Motors settlement, because
General Motors was representing the National Automobile
Chamber of Commerce, of which Ford was not a member.
On November 18, 1930, a telegram inviting settlement was
sent to defendant; but on the advice of its present attorney,
Mr. Farley, that it had a good defense to infringement, it
did not reply. Shortly thereafter, plaintiff filed its bill in
this case. (It appears defendant later offered plaintiff the
rights to the Pioch machine in settlement of its claim.)

On this record, defendant’s infringement was clearly
innocent until 1929, it having no knowledge of a claim of
infringement. This fact seems important also in appraising
its later conduct. While a violent commencement of in-
fringement does not seem to be essential to an increase of
damages (see Consolidated Co. v. Rubber Co., supra, where
the court held that defendant’s infringement commenced
innocently and later became willful), the presence or ab-
sence of this factor is important. Most of the cases of de-
liberate infringement are ones where the defendant began
infringing after warning or with knowledge of the plain-
tiff’s claim. When defendant learned it was using machines
held infringing in 1929, it had a serious problem on its
hands. If it had been notified of the infringement in 1925
and continued to use them, it would be fair to have required
it to have a substitute ready upon decision of infringement.

The District Court has previously gone into the ques-
tion of defendant’s duty in 1929 when it found that the
Walcott machines it was using had been held infringing.

90 Report of Special Master

It would seem that if it did not want to pay plaintiff for a
release of its patent rights it was incumbent upon it to dis-
continue their use as soon as practicable, at the risk of
having its infringement held deliberate if the court adhered
to the decision of infringement. However, in view of the
fact that the infringement was not of a product but of the
use of one of hundreds of machines in its line of production,
it would seem that it should be allowed a reasonable time
to decide its course of action and secure a substitute, before
its action should be held willful or wanton. I know of no
case on this point, and neither side has cited any, but this
conclusion seems in harmony with the general principles of
the cases on deliberate infringement.

Whether defendant did act with reasonable promptness
is a question of fact considered on the main trial by Your
Honor. The record here is somewhat stronger against the
defendant than on the main trial, because of the evidence
that defendant could have returned to the shaper, and could
have done so more rapidly than to develop a new machine.
(It would, however, have been necessary to build new ma-
chines, which might have taken nearly as long as to develop
the Pioch machines.) While nearly two years elapsed be-
fore the Walcotts were finally replaced, the fact that it
spent considerable time negotiating with the Walcott Com-
pany which had given it a patent guarantee and the lack of
damage to plaintiff, other than deprivation of royalties for
defendant’s use during this period, may be considered
factors in its favor (although I cannot agree with counsel
for defendant that competition between plaintiff and de-
fendant and actual damage to plaintiff is an essential
element of a case for increased damages).

In view of the lack of proof of notice or knowledge of
infringement by defendant prior to 1929 and the other cir-
cumstances mentioned, I am inclined toward the view taken
by the District Court that defendant’s infringement should
not be held willful. However, since Your Honor has pre-
viously thoroughly considered the question of the willful-
ness of defendant’s infringement after 1929 as well as that
of its good faith in compelling plaintiff to relitigate the
question of infringement, I prefer not to make a positive
recommendation on these questions, but rather to report
the facts to the court together with the contentions on both

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Report of Special Master 91

sides, pointing out to the court the difference in the factual
picture before it and that developed from the accounting.
This procedure was adopted by the master in Muther v.
United Shoe Machinery Co., supra, and was approved by
the court in that case.

Insofar, however, as the claim for increased dam-
ages is based upon defendant’s practice in keeping rec-
ords of the infringement and its conduct on the account-
ing, which matters were not before Your Honor on the
main trial, I reach the conclusion, upon consideration
of the question, that no basis for an increase is there to
be found. With respect to the question of records, de-
fendant has a well organized accounting system, which
has been shown to be as elaborate as is customary or
necessary in the automotive infringing field. It does not
keep costs by operations in producing parts, but such
costs would be of little practical use outside of a patent
accounting case like this, and the expense of keeping
them would not be justified. Because of their physical
bulk defendant can retain only a small portion of the rec-
ords made daily in its plant; and it has developed an
elaborate policy, embodied in written instructions, as to
the length of time each type of record will be kept. So
far as the records pertinent to this case are concerned,
defendant’s conduct can be summed up by saying that it
followed rigidly its routine practite in keeping records,
neither making any that it would not ordinarily have
made nor destroying any for the express purpose of
avoiding liability here. Time studies and overhead break-
down and inventory records have been destroyed, some of
the latter since the commencement of this suit; and no sepa-
rate account was kept of the concurrent production on the
Pioch and Walcott machines. While, however, these rec-
ords would have facilitated to some extent the determina-
tion of profits, the cases cited above where damages have
been increased on this ground involve more positive action
in destroying records. Even if all the records plaintiff
claims defendant should have kept after notice in 1929 were
available, there would still be wide gaps in the evidence
necessary to determine profits with certainty here. There
is also some point to defendant’s contention that it would
have been difficult to tell in advance of the accounting the
precise records needed upon it. Finally, as previously in-

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92 Report of Special Master

dicated, the usual penalty for mere failure to keep records,
without more, is to resolve doubts on the questions the
records would have cleared up against the defendant, and
there is no such aggravated conduct here as to require the
application of a more stringent penalty.

Similarly, I do not feel that defendant’s conduct on the
accounting provides a basis for increasing damages. I do
not agree with plaintiff that defendant’s whole purpose has
been to show a loss irrespective of the facts. Defendant
hired reputable independent accountants to prepare its
statements of account, and, while I have disagreed with
many of their conclusions (as also I have disagreed with
some of plaintiff’s conclusions), I think they filed honest ac-
counts. There is considerable support for their conclusions
on the issues (such as straightening overhead treatment)
on which I have sided with plaintiff. Nor did defendant
pursue here a policy of obstruction and concealment of
facts found in the Parker Rustproof and other similar
eases. Defendant readily produced records and witnesses
requested by the plaintiff, even in instances where the re-
sult was adverse to it. It answered the questions pro-
pounded in the master’s orders of account in considerable
detail, with the exception of one to which it made objection.
With respect to the various allegedly improper actions of
defendant on the accounting pointed to by plaintiff, I can-
not see anything going beyond legitimate defense of a law-
suit, except possibly that involving the witness Franklin
and the failure of defendant to state in its original accounts
that the shaper set forth as a standard of comparison for
the Model A shaft was a modification of the original ma-
chine. Some of the said actions, such as the use of obso-
lete shaper drawings, seem clearly to have been pure in-
advertence on its part. The situation here seems to me to
resemble that in Wrigley v. Larson, supra (an unfair com-
petition case), where, although the accounts filed by de-
fendant showed a loss as against substantial profits found
by the court, the court refused to assess the fees of plain-
tiff’s accountants against it on the ground that the de-
fendant’s accounts had correctly set forth the underlying
facts from which an account could be stated, the differences
in result being attributable to differences in the application
of principles.

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Report of Special Master 93

With respect to the charges made by defendant as to
plaintiff’s conduct, the only case cited where such charges
were specifically considered as a basis of an increase of
damages is that of Goodyear v. Overman, supra, in this
Circuit, which, however, was reversed on the question of
increase upon rehearing. The charges made by defendant
are of a serious nature, and I have found them not well
founded; however, there have been a great many charges of
unfair conduct of the other party in the briefs on both sides
in this case. Moreover, while I have not given credit to
the charges, if, as must be assumed to be the fact here,
defendant did not know of plaintiff’s claim of infringement
until 1929, its feeling that it has been the aggrieved party
is understandable.

In view of these considerations, I do not think that an
increase of damages should be awarded, unless the court
should be of the opinion that the difference on the record
here from the main trial with respect to the defendant’s
action in continuing infringement after notice in 1929
should justify a different finding from that previously made
by the court.

VIII. INTEREST.

Under my recommendations, the plaintiff is entitled to
its choice of $206,824.22 as defendant’s profits or $120,000
as its damages. It is clear that plaintiff is not entitled to
both. Goodyear v. Overman, supra. The question of in-
terest on the award has not been discussed in the briefs;
but, since Duplate v. Triplez, supra, the rule seems to be
the same for both profits and reasonable royalty that in-
terest runs from the time the damages are liquidated (gen-
erally, the date of the master’s report), in the absence of
special circumstances, such as deliberate infringement.
General Motors v. Dailey, 93 F. (2d) 938 (C. C. A. 6, 1937);
Horvath v. McCord, supra; Reynolds Spring v. L. A. Young
Industries, supra; Klooster, Patent Accountings, 76.

Respectfully submitted,
(Sgd) Dowatp L. Qvarre,
Special Master.

Detroit, Michigan,
March 3, 1941.

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Schedule A to Master’s Report
SCHEDULE A

PRODUCTION OF CAMSHAFTS ON INFRINGING
MACHINES
(For the Period from June 16, 1925 to March 15, 1931)
Model T Model A Tractor
Month T-410 A-6250 F-446
June 16 to 30, 1925 100,575 5,242
July si 172,650 9,681
August ia 92,700 9,245
September 9 119,500 8,745
October oF 222,950 9,363
November ee 212,950 8,825
December ee 171,880 8,872
Totals, June 16 to Dee. 31, 1925 1,093,205 59,973
January 1926 157,400 11,995
February ? 154,000 12,195
March ig 178,200 15,092
April "e 170,375 10,124
May *? 155,139 8,823
June ae 149,069 9,645
July _ 141,877 6,554
August si 151,676 6,766
September wig 141,814 6,552
October ne 145,830 4,914
November ef 110,418 4,830
December f 43,407 1,621
Totals, 1926 1,699,205 99,111
January 1927 83,909 4,636
February 68,810 7,032
March ee 93,781 13,510
April we 80,555 9,704
May si 83,520 6,944
June of 13,109 7,398
July be 12,711 6,531
August ad 14,837 9,977
September si 18,703 9,737
October #4 16,625 9,606
November me 12,285 2,553 10,380
December oe 7,241 6,734 5,250
Totals, 1927 506,086 9,287 100,705
January 1928 9,191 13,509 7,795
February ns 7,844 19,512 5,360
March ee 8,041 32,295 2,720
April “ 8,435 44,503
May el 12,508 55,306
June és 14,878 67,866
July a 13,712 69,537
August iis 13,491 96,098
September ee 11,760 89,353
October ae 9,445 117,348
November ae 5,444 118,145
December sa 5,699 119,984

Totals, 1928

120,448 843,456 15,875

Schedule A to Master’s Report 95

Model T Model A Tractor

Month T-410 A-6250 F-446
January 1929 1,222 165,184
February i 160,960
March ef 175,960
April we 180,249
May 9 194,724
June ef 186,297
July ae 198,713
August ve 198,044
September re 154,561
October €f 174,545
November nf 109,155
December a 63,601
Totals, 1929 1,222 1,961,993
January 1930 90,529
February *e 114,714
March s 156,386
April 192,275
May si 188,833
June we 175,441
July we 58,814
August i 107,808
September ae 99,128
October # 83,699
November #9 76,478
December a 55,160
Totals, 1930 1,399,265
January 1931 41,340
February #¢ 36,578
March as 14,585
Totals, 1931 92,503

Grand Totals 3,420,166 4,306,504 275,664

Note: Of the June, 1929, production, 76,032 shafts were produced from
The total
production subsequent to June 13, 1929 (the date notice of infringement was
received by defendant from plaintiff) was 2,500,652 Model A shafts.

June 1 to 12, inclusive, and 110,265 from June 13 to 30, inclusive.

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hedule B to Master’s Report

SCHEDULE B

PRORATION OF PRODUCTION ON CAMSHAFTS BETWEEN PIOCH
AND WALCOTT MACHINES, MAY 14, 1930 TO
MARCH 15, 1931, INCLUSIVE

E ; Production
Machines Available Per Shift Total Pioch Walcott
Melling Pioch Shifts on Piochs Production Production Production

ay, 1930 21 i 37 240 197,713 8,880 188,833
(May 14-30 for Pioch (May 14-30)
production )

21 1 62 240 190,321 14,880 175,441
21 1 22 240 64,094 5,280 58,814
21 1 48 240 119,328 11,520 107,808
ptember 21 1 47 240 110,408 11,280 99,128
tober 21 1 39.5 240 93,179 9,480 83,699
ovember 21 1 36 240 85,118 8,640 76,478
ember 21 1 26.5 240 61,520 6,360 55,160
uary, 1931 (1st half) 21 2 9 480 4,320
uary (2nd half) 21 4 18 960 62,940 17,280 41,340
(Full mo.) (Full mo.)
ebruary 2 and 3 21 + 5 960 11,886 4,800 7,086*
ebruary 4-28 13 6 32 1,440 75,572 46,080 29,492*
13 6 17 1,440 39,065 24,480 14,585

1,111,144 173,280 937,864

*Total for full month, February, 1931—36,578 shafts.

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PUBLISHER’S NOTICE:

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Clerk’s Notice; Plaintiff’s Objections to Master’s Report 101

CLERK’S NOTICE OF THE FILING OF THE
MASTER’S REPORT.

(Dated March 3, 1941.)

Copy
Swan, Frye & Hardesty
Attorneys-at-Law
1403 Ford Building
Detroit, Michigan
In re: The Gordon Form Lathe Company
vs.
Ford Motor Company
Equity Docket No. 4564.
Dear Sirs:
Please take notice that on March 3rd, 1941, Donald L.

Quaife filed his report as Special Master in the above en-
titled cause.

Very truly yours,

/s/ Grorce M. Reap,
Grorce M. Reap, Clerk,

H. U. S. District Court.

ec. To Bottum, Hupnati, Lecner, McNamara & MIcHAEL,
Milwaukee, Wisconsin.

BopMan, Lonotey, Bocie, MippLeton & Far.ey,
1400 Buhl Bldg., Detroit, Mich.

PLAINTIFF’S OBJECTIONS TO MASTER’S REPORT.
(Filed March 13, 1941.)

Now Comes The Gordon Form Lathe Company, Plain-
tiff herein, and states and files this its objections to the
report of the Honorable Donald L. Quaife, Special Master
herein, filed in the office of the Clerk of this Court on the
3rd day of March, 1941, in the following particulars, to-
wit:

1. To the Master’s finding of the amount of defend-
ant’s profits, savings, gains and advantages attributable
to its use of the infringing Walcott machines on its pro-
duction of Model A cam shafts over its use of other avail-

—_ —_ italiana ' a
NEESER RR LP STI IE ORE NE SRORNG ITS UENCE GS MILE SONNETS ONY AO IEC ET AR STR RS EMITS SSID SS RONG PINE

102 Plaintiff's Objections to Master’s Report

able standards of comparison, in so far only as such find-
ing understates the actual amount of such profits, savings,
gains and advantages by reason of:

A. The failure to adopt the Landis grinder as the
proper standard of comparison.

B. The adoption, as a standard of comparison, of
a modification of the Ford cam shaper which the Mas-
ter assumes would permit of each such shaft being
machined in a single operation.

C. In the alternative and without prejudice to the
foregoing objections: The failure to find that of all
defendant’s proposed standards of comparison involv-
ing the use of the Ford cam shaper as a standard of
comparison, the double shaper method (two Ford cam
shapers to machine each shaft) is the only proper
standard of comparison, if under applicable law the
Ford cam shaper may be regarded at all as a proper
standard of comparison.

2. To the statement (Report p. 23 [R. p. 24])* that
the ‘‘parallel head Walcott’? was adopted by defendant
after Pioch’s inspection thereof in 1929, whereas the fact is,
and the Master should have found and ruled, that the same
was not adopted by defendant.

Respectfully submitted,

Tue Gorvoy Form Larue Company,
By: /sgd/ Joun W. Micuatt,
/sgd/ Grorce D. Spoun,
/sgd/ F. O. Ricuey,
/sgd/ B. D. Warts,
Attorneys for Plaintiff.

Georce R. Frye,
Solicitor for Plaintiff,
1403 Ford Building,
Detroit, Michigan.

Dated: March 13, 1941.

* PRINTER’s NOTE: In the Plaintiff’s Objections to the Mas-
ter’s Report and in the Exceptions of the Defendant following, the
Record pages have been inserted in square brackets after the ref-
erences to the pages of the original Report, i.e. (Report p. 23
[R. p. 24].)

Nace aes ee UCR Re

— "

j Exceptions of Defendant to Master’s Report 103
: EXCEPTIONS OF DEFENDANT TO THE REPORT
f OF THE SPECIAL MASTER.

(Filed March 15, 1941.)

Now comes defendant, Ford Motor Company, by its
attorneys, and presents the following exceptions to the
report of the Special Master Donald L. Quaife filed in
) the above entitled action on March 3, 1941.

1. The Master erred in holding that ‘‘the testimony
of some (though by no means all) of its (defendant’s) wit-
nesses was * * * affected by the self interest of their em-
ployer’’ (Report p. 8 [R. p. 10]) and in that he did not
name those of defendant’s witnesses with proper record
references whose testimony he deemed was so affected and
those of defendant’s witnesses whose testimony was not so
affected.

2. The Master erred in that he did not limit the ac-
counting period to the date of actual notice of alleged in-
fringement, viz: June 13, 1929, and in holding that the
doctrine of Wine v. Enterprise, 297 U. S. 387 and not the
doctrine of Horvath v. McCord, 100 F. (2d) 326 (C. C. A.
6) applies here to relieve plaintiff, who had licensed others
to manufacture the patented machine prior to the issuance
of his patent, and who had full and complete knowledge
of the use by defendant of the alleged infringing machines,
from the clear bounden duty in law and in equity of giving
actual, clear and unequivocal, written notice to defendant
promptly upon the issuance of plaintiff’s patent and its
claim of infringement thereof against defendant. (Report
pp. 9 to 12 ine. [R. pp. 11 to 14 ine.].)

3. The Master erred in that he did not limit the ac-
counting period for use of the infringing machines from
the date of June 13, 1929 and in holding that ‘‘no defense
of laches as such is made here’’ (Master’s Report p. 12,
lines 4 and 3 from bottom of page [R. pp. 14 and 15]) in
the face of the proofs and defendant’s contentions and
arguments (Defendant’s Main Brief before Master p. 34
and Conclusion 6, page 140) wherein the defenses of both
laches and estoppel were fully and clearly urged against
any recovery from defendant prior to June 13, 1929, the
date of the only proved actual notice to defendant of plain-
tiff’s patent and plaintiff’s claim of infringement thereof.

OSE ALR GIG A A TRB TRO GLEE ILE SIT Bo MY TS TILLER OOS BESS Fon ON OT I i, NBM IER MY a

104 Exceptions of Defendant to Master’s Report

4. The Master erred as a matter of law and of fact
in holding that the non-tilting tool of the modified Wal-
cott machine fully disclosed and published in the Melling
patent No. 1,634,550 issued July 5, 1927, four months prior
to the commencement of defendant’s manufacture of Model
A shafts, was not a construction fully available to de-
fendant as a standard of comparison. (Report pp. 22, 23
[R. pp. 23, 24].)

5. The Master erred in that he held the modified Wal-
cott machine with a non-tilting tool to be an infringement
of the Gordon patent in suit when no proof was offered
by plaintiff to warrant or substantiate any such holding,
when such holding is not supported by any record evi-
dence and when such holding and interpretation covers
prior art constructions and is made in disregard of file
wrapper limitation, estoppels and prior art constructions,
none of which limitations, estoppels or prior art construc-
tions were given proper consideration by the Maste«.

6. The Master erred when, in holding the Westing-
house machine not available to defendant as a standard of
comparison, he referred to ‘‘experts called by the plain-
tiff’? (Report p. 24 [R. p. 25]) when the sole and singular
witness who testified for the plaintiff re this phase of the
case was the patentee Gordon, chief owner of the plaintiff’s
capital stock and whose ‘‘testimony was understandingly
affected by self-interest’? (compare Report p. 8 [R. p. 10]
—and Exception 1).

7. The Master erred in view of the concession by plain-
tiff (Report p. 26 [R. p. 27]) that the Westinghouse ma-
chine was available to defendant in that he held the said
Westinghouse machine was not a proper standard of com-
parison on the ground that there is no sufficiently reliable
evidence of the speeds obtainable with it in actual produc-
tion. This holding of the Master is in direct conflict with
the uncontradicted testimony of the disinterested witnesses
Truxal, Ladley (Westinghouse Company employees not
affected with any self interest of the defendant, Ford
Motor Company), the testimony of defendant

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