Appendix — Kelley Co. v. Rite-Hite Corp.

—> SUpreme Court, |:

be, 2 oF

BS 136. 24195

No. 94-

eeeEE—————EEeeEEEe »

IN THE

Supreme Court of the United States

OCTOBER TERM, 1994

KELLEY COMPANY, INC.,

Petitioner,

V.

RITE-HITE CORPORATION ET AL.,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

APPENDIX

THOMAS F. GING KEITH V. ROCKEY*

THOMAS S. MALCIAUSKAS THOMAS C. ELLIOTT, JR.

MARCOS REILLY KATHLEEN A. LYONS

Hinshaw & Culbertson Rockey, Rifkin and Ryther

222 North LaSalle Street Two First National Plaza

Chicago, Illinois 60601 20 South Clark Street

(312) 704-3000 Suite 2900

Chicago, Illinois 60603

(312) 704-5600

Counsel for Petitioner

*Counsel of Record

es

ud

Hnited States Court of Appeals for the Federal Cirrnit

Nos. 92-1206,-1260

RITE-HITE CORPORATION, ACME Dock SPECIALISTS, INC.,

ALLIED EQUIPMENT Corp., APPLIED HANDLING, INC..,

ANDERSON MATERIAL HANDLING Co., BLock-Dickson, INc.,

ROBERT LUND d/b/a/ HMH ComPANY, HOJ ENGINEERING &

SALES Co., INC., JOHNSON EQUIPMENT Co., JOHNL &

ASSOCIATES, INC., KELLER EQUIPMENT Co., INC., LOADING

Dock EQuiPMENT, INC., METRO Dock SPECIALISTS, INC.,

McCormick EQuIpMENT Company, INc., MID-SOUTH Dock

SYSTEMS, INC., HARRY MONOHAN, NIEHAUS INDUSTRIAL

SALES, INC., NORTHWAY MATERIAL HANDLING Co., INc.,

PEMCO MATERIAL HANDLING, INC., R.B. CURLIN, INC., RICE

EQUIPMENT COMPANY, STOKES EQUIPMENT COMPANY, INC.,

ROBERT SOPER LIMITED, TIMBERS & ASSOCIATES, INC.,

Topp EQUIPMENT CORPORATION, THAYER SYSTEMS, INC..,

and W.E. CARLSON CORPORATION,

Plaintiffs/Cross-Appellants,

v.

KELLEY COMPANY, INC.,

Defendant-A ppellant.

DECIDED: June 15, 1995

Before ARCHER, Chief Judge, Smitu, Senior Circuit Judge, and

RICH, NIES, NEWMAN, MAYER, MICHEL, PLAGER, LOvRIE,

CLEVENGER, RaDER, and SCHALL, Circuit Judges.'

' Circuit Judge Bryson joined the Federal Circuit on October 7, 1994, but has not

Participated in the disposition of this appeal.

- la-

Opinion of the court filed by Circuit Judge LOURIE, in

which Circuit Judges RiCH, MICHEL, PLAGER, CLEVENGER,

and SCHALL join; Chief Judge ARCHER, Senior Circuit Judge

SMITH, and Circuit Judges NiES and MAYER join as to part

AIIl; and Circuit Judges NEWMAN and RADER join as to

parts AI and B. Circuit Judge NiEs filed an opinion, joined by

Chief Judge ARCHER, Senior Circuit Judge SMITH, and

Circuit Judge MAYER, dissenting as to parts AI and AIV and

concurring in result as to part AII. Circuit Judge NEWMAN

filed an opinion, joined by Circuit Judge RADER, concurring in

part as to part AIV and dissenting as to parts AII and AIII.

Kelley Company appeals from a decision of the United States

District Court for the Eastern District of Wisconsin, awarding

damages for the infringement of U.S. Patent 4,373,847, owned by

Rite-Hite Corporation. Rite-Hite Corp. v. Kelley Co., 774 F. Supp.

1514, 21 USPQ2d 1801 (E.D. Wis. 1991). The district court

determined, inter alia, that Rite-Hite was entitled to lost profits for

lost sales of its devices that were in direct competition with the

infringing devices, but which themselves were not covered by the

patent in suit. The appeal has been taken in banc to determine

whether such damages are legally compensable under 35 U.S.C.

§ 284. We affirm in part, vacate in part, and remand.

BACKGROUND

On March 22, 1983, Rite-Hite sued Kelley, alleging that

Kelley’s “Truk Stop” vehicle restraint infringed Rite-Hite’s U.S.

Patent 4,373,847 (“the ’847 patent”).? The ’847 patent, issued

? Claim | of the patent reads:

A releasable locking device for securing a parked vehicle to an adjacent

relatively stationary upright structure, said device comprising a first means

mountable on an exposed surface of the structure, a second means mounted on

said first means for substantially vertical movement relative thereto between

operative and inoperative modes, the location of said second means when in an

inoperative mode being a predetermined distance beneath the location of said

-2a-

——

a

February 15, 1983, is directed to a device for securing a vehicle toa

loading dock to prevent the vehicle from separating from the dock

during loading or unloading. Any such separation would create a

gap between the vehicle and dock and create a danger for a forklift

operator.

Rite-Hite distributed all its products through its wholly-owned

and operated sales organizations and through independent sales

organizations (ISOs). During the period of infringement, the Rite-

Hite sales organizations accounted for approximately 30 percent of

the retail dollar sales of Rite-Hite products, and the ISOs

accounted for the remaining 70 percent. Rite-Hite sued for its lost

profits at the wholesale level and for the lost retail profits of its own

sales organizations. Shortly after this action was filed, several ISOs

moved to intervene, contending that they were “exclusive licen-

sees” of the °847 patent by virtue of “Sales Representative

Agreements” and “Dok-Lok Supplement” agreements between

themselves and Rite-Hite. The court determined that the ISOs

were exclusive licensees and accordingly, on August 31, 1984,

permitted them to intervene.’ The ISOs sued for their lost retail

profits.

second means when in an operative mode and in non-contacting relation with the

vehicle, and third means for releasably retaining said second means in an

operative mode; said second means including a first section projecting outwardly

a predetermined distance from said first means and the exposed surface of the

structure, one end of said first section being mounted on said first means for

selective independent movement relative thereto along a predetermined sub-

stantially vertical path, and a second section extending angularly upwardly from

said first section and being spaced outwardly a substantially fixed distance from

said first means and the exposed surface of the structure, said second means,

when in an operative mode, being adapted to interlockingly engage a portion of

the parked vehicle disposed intermediate the second section and said first means:

said second means, when in an inoperative mode, being adapted to be in a

lowered nonlocking relation with the parked vehicle.

>On February 15, 1989, seven ISOs that had not yet intervened brought a

separate action, Block-Dickson, Inc. v. Kelley Co., Case No. 89-C-0190 (E.D.

Wis. Feb. 15, 1989), which was consolidated with Rite-Hite’s action by

stipulation of the parties.

- 3a-

The district court bifurcated the liability and damage phases of

the trial and, on March 5, 1986, held the ’847 patent to be not

invalid and to be infringed by the manufacture, use, and sale of

Kelley’s Truk Stop device. The court enjoined further infringe-

ment. Rite-Hite Corp. v. Kelley Co., 629 F. Supp. 1042, 231 USPQ

161 (E.D. Wis. 1986). The judgment of liability was affirmed by

this court. Rite-Hite Corp. v. Kelley Co., 819 F.2d 1120, 2 USPQ2d

1915 (Fed. Cir. 1987).

On remand, the damage issues were tried to the court. Rite-Hite,

774 F. Supp. at 1514, 21 USPQ2d at 1801. Rite-Hite sought

damages calculated as lost profits for two types of vehicle restraints

that it made and sold: the “Manual Dok-Lok” model 55

(MDL-S55), which incorporated the invention covered by the

847 patent, and the “Automatic Dok-Lok” model 100

(ADL-100), which was not covered by the patent in suit. The

ADL-100 was the first vehicle restraint Rite-Hite put on the

market and it was covered by one or more patents other than the

patent in suit. The Kelley Truk Stop restraint was designed to

compete primarily with Rite-Hite’s ADL-100. Both employed an

electric motor and functioned automatically, and each sold for

$1,000-$1,500 at the wholesale level, in contrast to the MDL-SS,

which sold for one-third to one-half the price of the motorized

devices. Rite-Hite does not assert that Kelley’s Truk Stop restraint

infringed the patents covering the ADL-100.

Of the 3,825 infringing Truk Stop devices sold by Kelley, the

district court found that, “but for” Kelley’s infringement, Rite-

Hite would have made 80 more sales of its MDL-55; 3,243 more

sales of its ADL-100; and 1,692 more sales of dock levelers, a

bridging platform sold with the restraints and used to bridge the

edges of a vehicle and dock. The court awarded Rite-Hite as a

manufacturer the wholesale profits that it lost on lost sales of the

ADL-100 restraints, MDL-55 restraints, and restraint-leveler

packages. It also awarded to Rite-Hite as a retailer and to the ISOs

reasonable royalty damages on lost ADL-100, MDL-55, and

- 4a -

restraint-leveler sales caused by Kelley’s infringing sales. Finally,

prejudgment interest, calculated without compounding, was

awarded. Kelley’s infringement was found to be not willful.

On appeal, Kelley contends that the district court erred as a

matter of law in its determination of damages. Kelley does not

contest the award of damages for lost sales of the MDL-55

restraints; however, Kelley argues that (1) the patent statute does

not provide for damages based on Rite-Hite’s lost profits on

ADL-100 restraints because the ADL-100s are not covered by the

patent in suit; (2) lost profits on unpatented dock levelers are not

attributable to demand for the ’847 invention and, therefore, are

not recoverable losses; (3) the ISOs have no standing to sue for

patent infringement damages; and (4) the court erred in calculat-

ing a reasonable royalty based as a percentage of ADL-100 and

dock leveler profits. Rite-Hite and the ISOs challenge the district

court’s refusal to award lost retail profits and its award of

prejudgment interest at a simple, rather than a compound, rate.

We affirm the damage award with respect to Rite-Hite’s lost

profits as a manufacturer on its ADL-100 restraint sales, affirm the

court’s computation of a reasonable royalty rate, vacate the

damage award based on the dock levelers, and vacate the damage

award with respect to the ISOs because they lack standing. We

remand for dismissal of the ISOs’ claims and for a redetermination

of damages consistent with this opinion. The issues raised by Rite-

Hite are unpersuasive.

DISCUSSION

Because the technology, the ’847 patent, and the history of the

parties and their litigation are fully described in the opinions of the

district court and that of the earlier panel of our court that affirmed

the liability judgment, we will discuss the facts only to the extent

necessary to discuss the issues raised in this appeal.

- 5a-

In order to prevail on appeal on an issue of damages, an

appellant must convince us that the determination was based on an

erroneous conclusion of law, clearly erroneous factual findings, or a

clear error of judgment amounting to an abuse of discretion.

Amstar Corp. v. Envirotech Corp., 823 F.2d 1538, 1542,

3 USPQ2d 1412, 1415 (Fed. Cir. 1987); see also SmithKline

Diagnostics, Inc. v. Helena Lab. Corp., 926 F.2d 1161, 1163-65 &

n.2, 17 USPQ2d 1922, 1924-25 & n.2 (Fed. Cir. 1991).

A.

Kelley’s Appeal

I. Lost Profits on the ADL-100 Restraints

The district court’s decision to award lost profits damages

pursuant to 35 U.S.C. § 284 turned primarily upon the quality of

Rite-Hite’s proof of actual lost profits. The court found that, “but

for” Kelley’s infringing Truk Stop competition, Rite-Hite would

have sold 3,243 additional ADL-100 restraints and 80 additional

MDL-55 restraints. The court reasoned that awarding lost profits

fulfilled the patent statute’s goal of affording complete compensa-

tion for infringement and compensated Rite-Hite for the ADL-100

sales that Kelley “anticipated taking from Rite-Hite when it

marketed the Truk Stop against the ADL-100.” Rite-Hite, 774 F.

Supp. at 1540, 21 USPQ2d at 1821. The court stated, “[t]he rule

applied here therefore does not extend Rite-Hite’s patent rights

excessively, because Kelley could reasonably have foreseen that its

infringement of the ’847 patent would make it liable for lost

ADL-100 sales in addition to lost MDL-S55 sales.” Jd. The court

further reasoned that its decision would avoid what it referred to as

the “whip-saw” problem, whereby an infringer could avoid paying

lost profits damages altogether by developing a device using a first

patented technology to compete with a device that uses a second

patented technology and developing a device using the second

- 6a -

patented technology to compete with a device that uses the first

patented technology.

Kelley maintains that Rite-Hite’s lost sales of the ADL-100

restraints do not constitute an injury that is legally compensable by

means of lost profits. It has uniformly been the law, Kelley argues,

that to recover damages in the form of lost profits a patentee must

prove that, “but for” the infringement, it would have sold a product

covered by the patent in suit to the customers who bought from the

infringer. Under the circumstances of this case, in Kelley’s view,

the patent statute provides only for damages calculated as a

reasonable royalty. Rite-Hite, on the other hand, argues that the

only restriction on an award of actual lost profits damages for

patent infringement is proof of causation-in-fact. A patentee, in its

view, is entitled to all the profits it would have made on any of its

products “but for” the infringement. Each party argues that a

judgment in favor of the other would frustrate the purposes of the

patent statute. Whether the lost profits at issue are legally

compensable is a question of law, which we review de novo.

Our analysis of this question necessarily begins with the patent

statute. See General Motors Corp. v. Devex Corp., 461 U.S. 648,

653-54 (1983). Implementing the constitutional power under

Article I, section 8, to secure to inventors the exclusive right to

their discoveries, Congress has provided in 35 U.S.C. § 284 as

follows:

Upon finding for the claimant the court shall award the

claimant damages adequate to compensate for the infringe-

ment, but in no event less than a reasonable royalty for the use

made of the invention by the infringer, together with interest

and costs as fixed by the court.

35 U.S.C. § 284 (1988). The statute thus mandates that a claimant

receive damages “adequate” to compensate for infringement.

Section 284 further instructs that a damage award shall be “‘in no

event less than a reasonable royalty”; the purpose of this alternative

-Ja-

is not to direct the form of compensation, but to set a floor below

which damage awards may not fall. Del Mar Avionics, Inc. v.

Quinton Instrument Co., 836 F.2d 1320, 1326, 5 USPQ2d 1255,

1260 (Fed. Cir. 1987). Thus, the language of the statute is

expansive rather than limiting. It affirmatively states that damages

must be adequate, while providing only a lower limit and no other

limitation.

The Supreme Court spoke to the question of patent damages in

General Motors, stating that, in enacting § 284, Congress sought to

“ensure that the patent owner would in fact receive full compensa-

tion for ‘any damages’ [the patentee] suffered as a result of the

infringement.” General Motors, 461 U.S. at 654; See also H.R.

Rep. No. 1587, 79th Cong., 2d Sess., | (1946) (the Bill was

intended to allow recovery of “any damages the complainant can

prove”); S. Rep. No. 1503, 79th Cong., 2d Sess., 2 (1946) (same).

Thus, while the statutory text states tersely that the patentee

receive “adequate” damages, the Supreme Court has interpreted

this to mean that “adequate” damages should approximate those

damages that will fully compensate the patentee for infringement.

Further, the Court has cautioned against imposing limitations on

patent infringement damages, stating: “When Congress wished to

limit an element of recovery in a patent infringement action, it said

so explicitly.” General Motors, 461 U. S. at 653 (refusing to

impose limitation on court’s authority to award interest).

In Aro Mfg. Co. v. Convertible Top Replacement Co., 377 US.

476, 141 USPQ 681 (1964), the Court discussed the statutory

standard for measuring patent infringement damages, explaining:

The question to be asked in determining damages is “how

much had the Patent Holder and Licensee suffered by the

infringement. And that question [is] primarily: had the

Infringer not infringed, what would the Patentee Holder —

Licensee have made?”

« 8a -

ee ee

377 U.S. at 507, 141 USPQ at 694 (plurality opinion) (citations

omitted). This surely states a “but for” test. In accordance with the

Court’s guidance, we have held that the general rule for determin-

ing actual damages to a patentee that is itself producing the

patented item is to determine the sales and profits lost to the

patentee because of the infringement. Del Mar, 836 F.2d at 1326, 5

USPQ2d at 1260; see State Indus., Inc. v. Mor-Flo Indus., Inc., 883

F.2d 1573, 1577, 12 USPQ2d 1026, 1028 (Fed. Cir. 1989), cert.

denied, 493 U.S. 1022 (1990) (award of damages may be split

between lost profits as actual damages to the extent they are proven

and a reasonable royalty for the remainder). To recover lost profits

damages, the patentee must show a reasonable probability that,

“but for” the infringement, it would have made the sales that were

made by the infringer. Jd.; King Instrument Corp. v. Otari Corp.,

767 F.2d 853, 863, 226 USPQ 402, 409 (Fed. Cir. 1985), cert.

denied, 475 U.S. 1016 (1986).

Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152,

197 USPQ 726 (6th Cir. 1978), articulated a four-factor test that

has since been accepted as a useful, but non-exclusive, way for a

patentee to prove entitlement to lost profits damages. State Indus.

883 F.2d at 1577, 12 USPQ2d at 1028. The Panduit test requires

that a patentee establish: (1) demand for the patented product;

(2) absence of acceptable non-infringing substitutes; (3) manu-

facturing and marketing capability to exploit the demand; and

(4) the amount of the profit it would have made. Panduit, 575 F.2d

at 1156, 197 USPQ at 730. A showing under Panduit permits a

court to reasonably infer that the lost profits claimed were in fact

caused by the infringing sales, thus establishing a patentee’s prima

facie case with respect to “but for” causation. Kaufman Co. v.

Lantech, Inc., 926 F.2d 1136, 1141, 17 USPQ2d 1828, 1831 (Fed.

Cir. 1991). A patentee need not negate every possibility that the

purchaser might not have purchased a product other than its own,

absent the infringement. Jd. The patentee need only show that

there was a reasonable probability that the sales would have been

- 9a-

made “‘but for” the infringement. When the patentee establishes

the reasonableness of this inference, e.g., by satisfying the Panduit

test, it has sustained the burden of proving entitlement to lost

profits due to the infringing sales. Jd. at 1141, 17 USPQ2d at 1832.

The burden then shifts to the infringer to show that the inference is

unreasonable for some or all of the lost sales. Jd.

Applying Panduit, the district court found that Rite-Hite had

established “but for” causation. In the court’s view, this was

sufficient to prove entitlement to lost profits damages on the

ADL-100. Kelley does not challenge that Rite-Hite meets the

Panduit test and therefore has proven “but for’ causation; rather,

Kelley argues that damages for the ADL-100, even if in fact

caused by the infringement, are not legally compensable because

the ADL-100 is not covered by the patent in suit.

Preliminarily, we wish to affirm that the “test” for compen-

sability of damages under § 284 is not solely a “but for” test in the

sense that an infringer must compensate a patentee for any and all

damages that proceed from the act of patent infringement. Not-

withstanding the broad language of § 284, judicial relief cannot

redress every conceivable harm that can be traced to an alleged

wrongdoing. See Associated General Contractors, Inc. v. California

State Council of Carpenters, 459 U.S. 519, 536 (1983).* For

example, remote consequences, such as a heart attack of the

* As succinctly summarized by Keeton et al.:

In a philosophical sense, the consequences of an act go forward to eternity, and

the causes of an event go back to the dawn of human events, and beyond. But any

attempt to impose responsibility upon such a basis would result in infinite

liability for all wrongful acts, and would “set society on edge and fill the courts

with endless litigation.” As a practical matter, legal responsibility must be

limited to those causes which are so closely connected with the result and of such

significance that the law is justified in imposing liability. Some boundary must

be set to liability for the consequences of any act, upon the basis of some social

idea of justice or policy.

W. Page Keeton et al., Prosser & Keeton on the Law of Torts § 41, at 264 (Sthed.

1984) (citation and footnote omitted).

- 10a -

inventor or loss in value of shares of common stock of a patentee

corporation caused indirectly by infringement are not compensa-

ble. Thus, along with establishing that a particular injury suffered

by a patentee is a “but for” consequence of infringement, there

may also be a background question whether the asserted injury is of

the type for which the patentee may be compensated.

Judicial limitations on damages, either for certain classes of

plaintiffs or for certain types of injuries have been imposed in terms

of “proximate cause” or “foreseeability.” See Consolidated Rail

Corp. v. Gottshall, 114 S. Ct. 2396, 2406 (1994). Such labels have

been judicial tools used to limit legal responsibility for the

consequences of one’s conduct that are too remote to justify

compensation. See Holmes v. Securities Investor Protection Corp.,

503 U.S. 258 (1992). The general principles expressed in the

common law tell us that the question of legal compensability is one

“to be determined on the facts of each case upon mixed considera-

tions of logic, common sense, justice, policy and precedent.” See

1 Street, Foundations of Legal Liability 110 (1906) (quoted in

W. Page Keeton et al., Prosser & Keeton on the Law of Torts § 42,

at 279 (Sth ed. 1984)).°

We believe that under § 284 of the patent statute, the balance

between full compensation, which is the meaning that the Su-

preme Court has attributed to the statute, and the reasonable limits

of liability encompassed by general principles of law can best be

viewed in terms of reasonable, objective foreseeability. If a

particular injury was or should have been reasonably foreseeable by

an infringing competitor in the relevant market, broadly defined,

that injury is generally compensable absent a persuasive reason to

* After an explication of established patent law principles, the partial dissent of

Judge Nies ultimately agrees that there are judicial limitations on damages; the

dissent simply disagrees that the damages sought here fall within those

limitations, concluding instead that the damages are too “remote.” The dissent’s

disagreement thus centers not on whether lines are drawn regarding the

compensability of damages, but only on where those lines are to be drawn.

-lla-

the contrary. Here, the court determined that Rite-Hite’s lost sales

of the ADL-100, a product that directly competed with the

infringing product, were reasonably foreseeable. We agree with

that conclusion. Being responsible for lost sales of a competitive

product is surely foreseeable; such losses constitute the full

compensation set forth by Congress, as interpreted by the Supreme

Court, while staying well within the traditional meaning of proxi-

mate cause. Such lost sales should therefore clearly be

compensable.

Recovery for lost sales of a device not covered by the patent in

suit is not of course expressly provided for by the patent statute.

Express language is not required, however. Statutes speak in

general terms rather than specifically expressing every detail.

Under the patent statute, damages should be awarded “where

necessary to afford the plaintiff full compensation for the infringe-

ment.” General Motors, 461 U.S. at 654. Thus, to refuse to award

reasonably foreseeable damages necessary to make Rite-Hite

whole would be inconsistent with the meaning of § 284.

Kelley asserts that to allow recovery for the ADL-100 would

contravene the policy reason for which patents are granted: “[T]o

promote the progress of . . . the useful arts.” U.S. Const., art. 1, § 8,

cl. 8. Because an inventor is only entitled to exclusivity to the

extent he or she has invented and disclosed a novel, nonobvious,

and useful device, Kelley argues, a patent may never be used to

restrict competition in the sale of products not covered by the

patent in suit. In support, Kelley cites antitrust case law condemn-

ing the use of a patent as a means to obtain a “monopoly” on

unpatented material. See, e.g., Ethyl Gasoline Corp. v. United

States, 309 U.S. 436, 459 (1940) (“The patent monopoly of one

invention may no more be enlarged for the exploitation of a

monopoly of another than for the exploitation of an unpatented

article, or for the exploitation or promotion of a business not

embraced within the patent.”); Leitch Mfg. Co. v. Barber Co.,

302 U.S. 458, 463 (1938) (“[E]very use of a patent as a means of

- 12a-

obtaining a limited monopoly on unpatented material is prohibited

... whatever the nature of the device by which the owner of the

patent seeks to effect unauthorized extension of the monopoly.”’).

These cases are inapposite to the issue raised here. The present

case does not involve expanding the limits of the patent grant in

violation of the antitrust laws; it simply asks, once infringement of a

valid patent is found, what compensable injuries result from that

infringement, i.e., how may the patentee be made whole. Rite-Hite

is not attempting to exclude its competitors from making, using, or

selling a product not within the scope of its patent. The Truk Stop

restraint was found to infringe the ’847 patent, and Rite-Hite is

simply seeking adequate compensation for that infringement; this

is not an antitrust issue. Allowing compensation for such damage

will “promote the Progress of ... the useful Arts” by providing a

stimulus to the development of new products and industries.

See 1 Ernest B. Lipscomb III, Walker on Patents 65 (3d ed. 1984)

(quoting Simonds, Summary of the Law of Patents 9 (1883))

(“The patent laws promote the progress in different ways, promi-

nent among which are by protecting the investment of Capital in

the development and working of a new invention from ruinous

competition till the investment becomes remunerative.”’).°

Kelley further asserts that, as a policy matter, inventors should

be encouraged by the law to practice their inventions. This is not a

meaningful or persuasive argument, at least in this context. A

patent is granted in exchange for a patentee’s disclosure of an

invention, not for the patentee’s use of the invention. There is no

requirement in this country that a patentee make, use, or sell its

patented invention. See Continental Paper Bag Co. v. Eastern

Paper Bag Co., 210 U.S. 405, 424-30 (1908) (irrespective of a

patentee’s own use of its patented invention, it may enforce its

° The partial dissent of Judge Nies appears to confuse exclusion under a patent of

a product that comes within the scope of the claims with the determination of

damages to redress injury caused by patent infringement once infringement has

been found.

- l3a-

a ee

rights under the patent). If a patentee’s failure to practice a

patented invention frustrates an important public need for the

invention, a court need not enjoin infringement of the patent. See

35 U.S.C. § 283 (1988) (courts may grant injunctions in accor-

dance with the principles of equity). Accordingly, courts have in

rare instances exercised their discretion to deny injunctive relief in

order to protect the public interest. See, e.g., Hybritech, Inc. v.

Abbott Lab., 4 USPQ2d 1001 (C.D. Cal. 1987) (public interest

required that injunction not stop supply of medical test kits that the

patentee itself was not marketing), affd, 849 F.2d 1446, 7

USPQ2d 1191 (Fed. Cir. 1988); Vitamin Technologists, Inc. v.

Wisconsin Alumni Research round., 64 USPQ 285 (9th Cir.

1945) (public interest warranted refusal of injunction on irradia-

tion of oleomargarine); City of Milwaukee v. Activated Sludge,

Inc., 21 USPQ 69 (7th Cir. 1934) (injunction refused against city

operation of sewage disposal plant because of public health

danger). Whether a patentee sells its patented invention is not

crucial in determining lost profits damages. Normally, if the

patentee is not selling a product, by definition there can be no lost

profits. However, in this case, Rite-Hite did sell its own patented

products, the MDL-S55 and the ADL-100 restraints.

Kelley next argues that to award lost profits damages on Rite-

Hite’s ADL-100s would be contrary to precedent. Citing Panduit,

Kelley argues that case law regarding lost profits uniformly

requires that “the intrinsic value of the patent in suit is the only

proper basis for a lost profits award.” Kelley argues that each prong

of the Panduit test focuses on the patented invention; thus, Kelley

asserts, Rite-Hite cannot obtain damages consisting of lost profits

on a product that is not the patented invention.’

’ The partial dissent of Judge Nies agrees with Kelley, citing several Supreme

Court decisions. However, the Supreme Court has provided no definitive ruling

on the proper scope of damages to redress lost sales of diverted products such as

those in this case. The dissent also relies on dicta in older district court cases;

however, the issue directly before us is one of first impression in this court.

Moreover, the more recent (post-1946) cases cited by the dissent do not hold

- l4a-

Generally, the Panduit test has been applied when a patentee is

seeking lost profits for a device covered by the patent in suit.

However, Panduit is not the sine qua non for proving “but for”

causation. If there are other ways to show that the infringement in

fact caused the patentee’s lost profits, there is no reason why

another test should not be acceptable. Moreover, other fact

situations may require different means of evaluation, and failure to

meet the Panduit test does not ipso facto disqualify a loss from

being compensable.

In any event. the only Panduit factor that arguably was not met

in the present fact situation is the second one, absence of

acceptable non-infringing substitutes. Establishment of this factor

tends to prove that the patentee would not have lost the sales to a

non-infringing third party rather than to the infringer. That,

however, goes only to the question of proof. Here, the only

substitute for the patented device was the ADL- 100, another of the

patentee’s devices. Such a substitute was not an “acceptable, non-

infringing substitute” within the meaning of Panduit because,

being patented by Rite-Hite, it was not available to customers

except from Rite-Hite. Cf State Indus., 883 F.2d at 1578,

12 USPQ2d at 1030-31. Rite-Hite therefore would not have lost

the sales to a third party. The second Panduit factor thus has been

met. If, on the other hand, the ADL-100 had not been patented

and was found to be an acceptable substitute, that would have been

a different story, and Rite-Hite would have had to prove that its

customers would not have obtained the ADL-100 from a third

party in order to prove the second factor of Panduit.

Kelley’s conclusion that the lost sales must be of the patented

invention thus is not supported. Kelley’s concern that lost profits

that a patentee may receive damages in the form of lost profits only for diverted

sales of devices covered by the patent in suit. Rather, the cases relied upon either

relate to recovery for lost sales of items sold with devices covered by the patent in

suit under the entire market value rule, or they stand for the unremarkable

Proposition that the patentee must be in the business of selling a device in order

to recover damages for alleged lost sales of such a device.

- 1Sa-

must relate to the “intrinsic value of the patent” is subsumed in the

“but for” analysis; if the patent infringement had nothing to do

with the lost sales, “but for” causation would not have been proven.

However, “but for” causation is conceded here. The motive, or

motivation, for the infringement is irrelevant if it is proved that the

infringement in fact caused the loss. We see no basis for Kelley’s

conclusion that the lost sales must be of products covered by the

infringed patent.

Kelley has thus not provided, nor do we find, any justification in

the statute, precedent, policy, or logic to limit the compensability

of lost sales of a patentee’s device that directly competes with the

infringing device if it is proven that those lost sales were caused in

fact by the infringement. Such lost sales are reasonably foreseeable

and the award of damages is necessary to provide adequate

compensation for infringement under 35 U.S.C. § 284. Thus, Rite-

Hite’s ADL-100 lost sales are legally compensable and we affirm

the award of lost profits on the 3,283 sales lost to Rite-Hite’s

wholesale business in ADL-100 restraints.*

II. Damages on the Dock Levelers

Based on the “entire market value rule,” the district court

awarded lost profits on 1,692 dock levelers that it found Rite-Hite

would have sold with the ADL-100 and MDL-S5S5 restraints. Kelley

* The partial dissent of Judge Nies makes much of the fact that Rite-Hite could

not mark its ADL-100 restraints with notice of the 847 patent, cautioning, “[t]o

hold that a patentee may recover damages respecting injury to its business in

products that do not embody the invention which are unmarked or marked with

a different patent number would treat a patentee that does not practice its

invention more favorably than a patentee that does. The marking statute

generates absurd results when applied to damages tied to products not made

under the patent in suit.” We disagree. The marking statute provides that if a

product is not marked, no damages shall be recovered by the patentee except on

proof that the infringer was notified of the infringement. See 35 U.S.C. § 287(a)

(1988). That a patentee cannot recover damages in the absence of actual notice

when it has not marked remains the law, but that law does not preclude assessing

damages for lost sales of diverted products after actual notice of infringement

has been given.

- 16a -

argues that this award must be set aside because Rite-Hite failed to

establish that the dock levelers were eligible to be included in the

damage computation under the entire market value rule. We agree.

When a patentee seeks damages on unpatented components sold

with a patented apparatus, courts have applied a formulation

known as the “entire market value rule” to determine whether such

components should be included in the damage computation,

whether for reasonable royalty purposes,” see Leesona Corp. v.

United States, 599 F.2d 958, 974, 202 USPQ 424, 439 (Ct. Cl.,

cert. denied, 444 U.S. 991 (1979), or for lost profits purposes, see

Paper Converting Machine Co. v. Magna-Graphics Corp., 745 F.2d

11, 23, 223 USPQ 591, 599 (Fed. Cir. 1984). Early cases invoking

the entire market value rule required that for a patentee owning an

“improvement patent” to recover damages calculated on sales of a

larger machine incorporating that improvement, the patentee was

required to show that the entire value of the whole machine, as a

marketable article, was “properly and legally attributable” to the

patented feature. See Garretson v. Clark, 111 US. 120, 121

(1884); Westinghouse Elec. & Mfg. Co. v. Wagner Elec. & Mfg.

Co., 225 U.S. 604, 615 (1912) (same). Subsequently, our prede-

cessor court held that damages for component parts used with a

patented apparatus were recoverable under the entire market value

rule if the patented apparatus “was of such paramount importance

that it substantially created the value of the component parts.”

Marconi Wireless Telegraph Co. v. United States, 53 USPQ 246,

250 (Ct. Cl. 1942), aff'd in part and vacated in part, 320 U.S. 1

(1943). We have held that the entire market value rule permits

recovery of damages based on the value of a patentee’s entire

apparatus containing several features when the patent-related

feature is the “basis for customer demand.” State Indus., 883 F.2d

* This issue of royalty base is not to be confused with the relevance of anticipated

collateral sales to the determination of a reasonable royalty rate. See Deere & Co.

v. International Harvester Co., 710 F.2d 1551, 1559, 218 USPQ 481, 487 (Fed.

Cir. 1983); Trans-World Mfg. Corp. v. Al Nyman & Sons, Inc., 750 F.2d 1552,

1568, 224 USPQ 259, 269-70 (Fed. Cir. 1984).

-17a-

at 1580, 12 USPQ2d at 1031; TWM Mfg. Co. v. Dura Corp., 789

F.2d 895, 900-01, 229 USPQ 525, 528 (Fed. Cir.), cert. denied,

479 U.S. 852 (1986).

The entire market value rule has typically been applied to

include in the compensation base unpatented components of a

device when the unpatented and patented components are physi-

cally part of the same machine. See, e.g, Western Elec. Co. v.

Stewart-Warner Corp., 631 F.2d 333, 208 USPQ 183 (4th Cir.

1980), cert. denied, 450 U.S. 971 (1981). The rule has been

extended to allow inclusion of physically separate unpatented

components normally sold with the patented components. See, e.g.,

Paper Converting, 745 F.2d at 23, 223 USPQ at 599. However, in

such cases, the unpatented and patented components together

were considered to be components of a single assembly or parts of a

complete machine, or they together constituted a functional unit.

See, e.g., Velo-Bind, Inc. v. Minnesota Mining & Mfg. Co., 647 F.2d

965, 211 USPQ 926 (9th Cir.), cert. denied, 454 U.S. 1093

(1981).

In Paper Converting, this court articulated the entire market

value rule in terms of the objectively reasonable probability that a

patentee would have made the relevant sales. See 745 F.2d at 23,

223 USPQ at 599-600. Furthermore, we may have appeared to

expand the rule when we emphasized the financial and marketing

dependence of the unpatented component on the patented compo-

nent. See id. In Paper Converting, however, the rule was applied to

allow recovery of profits on the unpatented components only

because all the components together were considered to be parts of

a single assembly. The references to “financial and marketing

dependence” and “reasonable probability” were made in the

context of the facts of the case and did not separate the rule from

its traditional moorings.

Specifically, recovery was sought for the lost profits on sales of

an entire machine for the high speed manufacture of paper rolls

comprising several physically separate components, only one of

- 18a -

which incorporated invention. The machine was comprised of the

patented “rewinder” component and several auxiliary components,

including an “unwind stand” that supported a large roll of supply

paper to the rewinder, a “core loader” that supplied paperboard

cores to the rewinder, an “embosser” that embossed the paper and

provided a special textured surface, and a “tail sealer” that sealed

the paper’s trailing end to the finished roll. Although we noted that

the auxiliary, components had “separate usage” in that they each

separately performed a part of an entire rewinding operation, the

components together constituted one functional unit, including the

patented component, to produce rolls of paper. The auxiliary

components derived their market value from the patented rewinder

because they had no useful purpose independent of the patented

rewinder.

Similarly, our subsequent cases have applied the entire market

value rule only in situations in which the patented and unpatented

components were analogous to a single functioning unit. See, é.2.,

Kalman v. Berlyn Corp., 914 F.2d 1473, 1485, 16 USPQ2d 1093,

1102 (Fed. Cir. 1990) (affirming award of damages for filter

screens used with a patented filtering device); TWM, 789 F.2d at

901, 229 USPQ at 528 (affirming award of damages for unpat-

ented wheels and axles sold with patented vehicle suspension

system); Kori Corp. v. Wilco Marsh Buggies & Draglines, Inc., 761

F.2d 649, 656, 225 USPQ 985, 989 (Fed. Cir.) (affirming an

award of damages for unpatented uppers of an improved amphibi-

ous vehicle having a patented pontoon structure), cert. denied, 474

U.S. 902 (1985).

Thus, the facts of past cases clearly imply a limitation on

damages, when recovery is sought on sales of unpatented compo-

nents sold with patented components, to the effect that the

unpatented components must function together with the patented

component in some manner so as to produce a desired end product

or result. All the components together must be analogous to

components of a single assembly or be parts of a complete

- 19a -

machine, or they must constitute a functional unit. Our precedent

has not extended liability to include items that have essentially no

functional relationship to the patented invention and that may have

been sold with an infringing device only as a matter of convenience

or business advantage. We are not persuaded that we should extend

that liability. Damages on such items would constitute more than

what is “adequate to compensate for the infringement.”

The facts of this case do not meet this requirement. The dock

levelers operated to bridge the gap between a loading dock and a

truck. The patented vehicle restraint operated to secure the rear of

the truck to the loading dock. Although the two devices may have

been used together, they did not function together to achieve one

result and each could effectively have been used independently of

each other. The parties had established positions in marketing

dock levelers long prior to developing the vehicle restraints. Rite-

Hite and Kelley were pioneers in that industry and for many years

were primary competitors. Although following Rite-Hite’s intro-

duction of its restraints onto the market, customers frequently

solicited package bids for the simultaneous installation of restraints

and dock levelers, they did so because such bids facilitated

contracting and construction scheduling, and because both

Rite-Hite and Kelley encouraged this linkage by offering combina-

tion discounts. The dock levelers were thus sold by Kelley with the

restraints only for marketing reasons, not because they essentially

functioned together. We distinguish our conclusion to permit

damages based on lost sales of the unpatented (not covered by the

patent in suit) ADL-100 devices, but not on lost sales of the

unpatented dock levelers, by emphasizing that the Kelley Truk

Stops were devices competitive with the ADL-100s, whereas the

dock levelers were merely items sold together with the restraints

for convenience and business advantage. It is a clear purpose of the

patent law to redress competitive damages resulting from infringe-

ment of the patent, but there is no basis for extending that recovery

to include damages for items that are neither competitive with nor

- 20a -

function with the patented invention. Promotion of the useful arts,

see U.S. Const., art. I, § 8, cl. 8, requires one, but not the other.

These facts do not establish the functional relationship necessary

to justify recovery under the entire market value rule. Therefore,

the district court erred as a matter of law in including them within

the compensation base. Accordingly, we vacate the court’s award

of damages based on the dock leveler sales.

Ill. Standing of the ISOs

The ISOs asserted claims for patent infringement under

35 U.S.C § 281 as co-plaintiffs with Rite-Hite and were awarded

damages calculated on the basis of a reasonable royalty at the retail

level on both restraints and dock levelers, based on the number of

sales each asserted it lost to Kelley. Kelley challenges any award of

damages to the ISOs on the ground that the ISOs had no standing

to seek recovery for patent infringement. The ISOs argue that the

exclusivity of their sales territories gave them standing as “exclu-

sive licensees.” The question of standing to sue is a jurisdictional

one, Imperial Tobacco, Ltd. v. Philip Morris, Inc., 899 F. 2d 1575,

1580 n.7, 14 USPQ2d 1390, 1393 n.7 (Fed. Cir. 1990), which we

review de novo, Transamerica Ins. Corp. v. United States, 973 F.2d

1572 (Fed. Cir. 1992). We agree with Kelley that the ISOs must

be dismissed for lack of standing.

The right of a patentee to a remedy for patent infringement is

created by the statute, Arachnid, Inc. v. Merit Indus., Inc., 939 F.2d

1574, 1578, 19 USPQ2d 1513, 1516-17 (Fed. Cir. 1991), which

provides that a “patentee” shall have remedy by civil action for

infringement of his or her patent, 35 U.S.C. § 281 (1988). The

term “patentee” includes “not only the patentee to whom the

patent was issued but also the successors in title to the patentee.”

35 U.S.C. § 100(d) (1988).

Generally, one seeking money damages for patent infringement

must have held legal title to the patent at the time of the

infringement. Crown Die & Tool Co. y. Nye Tool & Machine

-2la-

Works, 261 U.S. 24, 40-41 (1923). A conveyance of legal title by

the patentee can be made only of the entire patent, an undivided

part or share of the entire patent, or all rights under the patent in a

specified geographical region of the United States. Waterman v.

Mackenzie, 138 U.S. 252, 255 (1891). A transfer of any of these is

an assignment and vests the assignee with title in the patent, and a

right to sue infringers.'° Jd. A transfer of less than one of these

three interests is a license, not an assignment of legal title, and it

gives the licensee no right to sue for infringement at law in the

licensee’s own name. Jd.

Under certain circumstances, a licensee may possess sufficient

interest in the patent to have standing to sue as a co-plaintiff with

the patentee. See id. (if necessary to protect the rights of all parties,

the licensee may be joined as co-plaintiff); Independent Wireless

Tel. Co. v. Radio Corp. of America, 269 U.S. 459, 468 (1926) (if

the patentee refuses or is unable to join an exclusive licensee as co-

plaintiff, the licensee may make him a party defendant). Such a

licensee is usually an “exclusive licensee.’ To be an exclusive

licensee for standing purposes, a party must have received, not only

the right to practice the invention within a given territory, but also .

the patentee’s express or implied promise that others shall be

excluded from practicing the invention within that territory as well.

See Independent Wireless, 269 U.S. at 468-69. If the party has not

received an express or implied promise of exclusivity under the

patent, i.e., the right to exclude others from making, using, or

selling the patented invention, the party has a “bare license,” and

has received only the patentee’s promise that that party will not be

sued for infringement. See Western Elec. Co. v. Pacent Reproducer

Corp., 42 F.2d 116, 118, 5 USPQ 105, 106 (2d Cir.), cert. denied,

282 U.S. 873 (1930).

'° In the first and third cases, the assignee may sue in its name alone; in the second

case, it may sue jointly with the assignor. Waterman v. Mackenzie, 138 U.S.

252, 255 (1891).

- 22a -

a . n

The ISOs maintain that they are allowed to join as co-plaintiffs

because each claims it has a virtually exclusive license to sell

products made by Rite-Hite to particular customers in an exclusive

sales territory. To determine whether the ISOs have standing to be

co-plaintiffs, we look to their contracts with Rite-Hite.

The typical original ISO contract provided in pertinent part:

Representative’s right to solicit sales of the Company’s

products in the Territory shall be exclusive in that the

company will not appoint any other sales representative in the

territory so long as, in Company’s good faith judgment,

Representative is doing an adequate job in the entire Territory

for all listed products. [If not,] Company shall have the right

to reduce the Territory, if it gives Representative notice of the

change. Company shall in no event be liable for any violation

or infringement of Representative’s territorial rights hereun-

der except such as are committed directly by Company.

Company also reserves the non-exclusive right to make sales

of its products within the Territory directly to the motor

freight industry, governmental agencies, government contrac-

tors, and any other purchasers which, in Company’s judge-

ment, can be served best by direct sales.

The subject products are “All Rite-Hite Mechanical and Hydrau-

lic Dock Levelers and Related Equipment.” The word “patent”

appears nowhere in this document, although, just prior to their

intervention as plaintiffs, many of the ISOs executed supplements

to their contracts which specified that the “products” of the Sales

Representative Agreement include “products manufactured and

sold by [Rite-Hite]”’ that embody “any of the claims set forth in

Rite-Hite patents relating to ‘Dok-Lok’ devices, including (but not

by any way of limitation ) U.S. Patent No. 4,373,847.” Rite-Hite,

774 F. Supp. at 1523, 21 USPQ2d at 1807 (alteration in original)

(first emphasis supplied). The agreement also provided that each

ISO had, in addition to the right to solicit sales for Rite-Hite, the

- 23a -

right to sell products made by Rite-Hite. Rite-Hite reserved the

right to sell its products to the motor freight industry."

In the original agreement, Rite-Hite itself expressly retained

substantial rights to sell within the assigned territories to specific

classes of purchases and to “any other purchasers which, in

Company’s judgement, can be served best by direct sales.” The last

minute modifications on the eve of litigation included for the first

time products covered by the patent in the definition of the range of

products covered by the agreement, and reduced the retained

rights of Rite-Hite to sell within the assigned territories. Neither

the original agreements nor the modifications granted the ISOs

any right to exclude others under the patent.

We agree with Kelley that the district court’s conclusion that

these contracts conveyed a “sufficient, legally recognized interest

in the rights secured by the [’847] patent” to confer standing on

the ISOs was erroneous as a matter of law. Id., 774 F. Supp. at

1525, 21 USPQ2d at 1808 (alteration in original). The contracts in

this case were not exclusive patent licenses. As noted, they did not

mention the word “patent” until the eve of this lawsuit. The ISO

contracts permitted the ISOs only to solicit and make sales of

products made by Rite-Hite in a particular “exclusive” sales

territory. While the agreements conveyed the right to sell restraints

covered by the patent, any “exclusivity” related only to sales

territories, not to patent rights. Even this sales exclusivity was

conditional on Rite-Hite’s judgment that the ISOs were doing an

‘adequate job.”

Most particularly, the ISOs had no right under the agreements

to exclude anyone from making, using, or selling the claimed

invention. The ISO’s could not exclude from their respective

territories other ISQs, third parties, or even Rite-Hite itself. Any

remedy an ISO might have had for violation of its rights would lie

'' The court found that this industry was an insignificant market for Rite-Hite’s

products, including its vehicle restraints.

- 24a -

in a breach of contract action against Rite-Hite, if the agreement

was breached, not in a patent infringement action against infring-

ers. Rite-Hite had no obligation to file infringement suits at the

request of an ISO and the ISOs had no right to share in any

recovery from litigation. Moreover, appellees have not contended

that such obligations and rights are to be implied. Nor do appellees

even argue that the ISOs had the right under their contracts to

bring suit for infringement against another ISO or a third party,

making Rite-Hite an involuntary plaintiff. To the contrary, under

their agreement, if an ISO sold in another’s territory, the profits

were shared according to Rite-Hite’s “split commission” rules.

While the patentee and the ISOs have cooperated in this litigation,

that fact alone does not establish their right to sue.

Weinar v. Rollform, 744 F.2d 797, 223 USPQ 369 (Fed. Cir.

1984), cert. denied, 470 U.S. 1084 (1985), which is cited by Rite-

Hite in support of the ISOs’ position, is not to the contrary. In that

case, a damage award was upheld to a licensee with the exclusive

right to sell in the entire United States. Jd. at 807, 223 USPQ at

374. However, the exclusive licensee in Weinar was found to have

received more than a “bare” license from the patentee. Jd. The

exclusive licensee and the patentee “shar[ed] the property rights

represented by a patent.” Jd. That is not the case here. The ISOs

were not licensees under the patent, except perhaps as non-

exclusive licensees by implication. They were not granted any right

to exclude others under the patent. They do not accordingly

“share” with the patentee the property rights represented by the

patent so as to have standing to sue as a co-plaintiff with the

patentee.

These agreements were simply sales contracts between Rite-

Hite and its independent distributors. They did not transfer any

proprietary interest in the ’847 patent and they did not give the

ISOs the right to sue. If the ISOs lack a remedy in this case, it is

because their agreements with Rite-Hite failed to make provisions

for the contingency that the granted sales exclusivity would not be

- 25a -

maintained. The ISOs could have required Rite-Hite to sue

infringers and arrangements could have been agreed upon concern-

ing splitting any damage award. Apparently, this was not done.

The grant of a bare license to sell an invention in a specified

territory, even if it is the only license granted by the patentee, does

not provide standing without the grant of a right to exclude others.

The ISOs are legally no different from the individual salespersons

whom the district court earlier refused to allow to join the suit.

Rite-Hite, 774 F. Supp. at 1536, 21 USPQ2d at 1818 (holding that

sales persons employed by the sales organizations are not entitled

to recover damages as agents of the exclusive licensee-sales

organizations). They are not proper parties to this suit, and their

claims must be dismissed. '”

IV. Computztion of Reasonable Royalty

The district court found that Rite-Hite as a manufacturer was

entitled to an award of a reasonable royalty on 502 infringing

restraint or restraint-leveler sales for which it had not proved that it

contacted the Kelley customer prior to the infringing Kelley sale.

Rite-Hite, 774 F. Supp. at 1534, 21 USPQ2d at 1816. The court

awarded a royalty equal to approximately fifty percent of Rite-

Hite’s estimated lost profits per unit sold to retailers. Jd. at 1535, 21

'2 Appellees contend that the issue of the ISOs’ standing to recover damages is

law of the case because of Kelley’s failure to appeal during the liability phase of

the trial the district court’s order permitting intervention, for which reconsider-

ation was denied in August 1984. We disagree. At the time of intervention,

other unfair competition claims were asserted, now abandoned. Further, in the

damage phase of the case, now appealed, the district court heard evidence and

made detailed findings of fact and conclusions of law regarding the background

of the ISOs, the exclusivity of their licenses, and their entitlement to damages.

Rite-Hite Corp. v. Kelley Co., 774 F.Supp. 1514, 1522-25, 1536, 21 USPQ2d

1801, 1806-08, 1818 (E.D. Wis. 1991). In so doing, the court addressed

arguments and evidence that were not before it in its summary August 1984

ruling. /d. at 1524, 21 USPQ2d at 1808. The issue presented here, the ISOs’

right to recover damages, was not finally resolved by the district court until the

damage phase of trial. Indeed, the court expressly stated in the Rite-Hite

damage opinion that the ISOs’ right to patent damages was at issue.

- 26a -

USPQ2d at 1817. Further, the court found that Rite-Hite as a

retailer was entitled to a reasonable royalty amounting to approxi-

mately one-third its estimated lost distribution income per infring-

ing sale. Kelley challenges the amount of the royalty as grossly

excessive and legally in error.

A patentee is entitled to no less than a reasonable royalty on an

infringer’s sales for which the patentee has not established entitle-

ment to lost profits. 35 U.S.C. § 284 (1988); Hanson v. Alpine

Valley Ski Area, Inc.,718 F.2d 1075, 1078, 219 USPQ 679, 681-82

(Fed. Cir. 1983) (“If actual damages cannot be ascertained, then

a reasonable royalty must be determined.”). The royalty may be

based upon an established royalty, if there is one, or if not, upon the

supposed result of hypothetical negotiations between the plaintiff

and defendant. Jd. at 1078, 219 USPQ at 682." The hypothetical

negotiation requires the court to envision the terms of a licensing

agreement reached as the result of a supposed meeting between the

patentee and the infringer at the time infringement began. Jd.

“One challenging only the court’s finding as to amount of damages

awarded under the ‘reasonable royalty’ provision of § 284, there-

fore, must show that the award is, in view of all the evidence, either

so outrageously high or so outrageously low as to be unsupportable

as an estimation of a reasonably royalty.” Lindemann Maschinen-

'? The hypothetical negotiation is often referred to as a “willing licensor/

willing licensee” negotiation. However, this is an inaccurate, and even

absurd, characterization when, as here, the patentee does not wish to

grant a license. See Hanson v. Alpine Va ‘ley Ski Area, Inc., 718 F.2d

1075, 1081, 219 USPQ 679, 684 (The willing licensee/licensor concept

is “employed by the court as a means of arriving at reasonable

compensation and its validity does not depend on the actual willingness

of the parties to the lawsuit to engage in such negotiations[; t here is, of

course, no actual willingness on either side.””): TWM Mfg. Co. v. Dura

Corp., 789 F.2d 895, 900, 229 USPQ 525, 528 (Fed. Cir.) (“The

willing licensee/licensor approach must be flexibly applied as a ‘device

in the aid of justice.’”) (citation omitted), cert. denied, 479 U.S. 852

(1986).

- 27a -

fabrik GmbH v. American Hoist & Derrick Co., 895 F.2d 1403,

1406, 13 USPQ2d 1871, 1874 (Fed. Cir. 1990).

The district court here conducted the hypothetical negotiation

analysis. It determined that Rite-Hite would have been willing to

grant a competitor a license to use the °847 invention only if it

received a royalty of no less than one-half of the per unit profits

that it was foregoing. In so determining, the court considered that

the ’847 patent was a “pioneer” patent with manifest commercial

success; that Rite-Hite had consistently followed a policy of

exploiting its own patents, rather than licensing to competitors; and

that Rite-Hite would have had to forego a large profit by granting a

license to Kelley because Kelley was a strong competitor and Rite-

Hite anticipated being able to sell a large number of restraints and

related products. See Deere & Co. v. International Harvester Co.,

710 F.2d 1551, 1591 218 USPQ 481, 487 (Fed. Cir. 1983) (court

may consider impact of anticipated collateral sales); Georgia-

Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116,

166 USPQ 235, (S.D. N.Y. 1970) (wide range of factors relevant

to hypothetical negotiation), modified and affd., 446 F.2d 295, 170

USPQ 369 (2d Cir.), cert. denied, 404 U.S. 870 (1971). It was ©

thus not unreasonable for the district court to find that an unwilling

patentee would only license for one-half its expected lost profits

and that such an amount was a reasonable royalty. The fact that

the award was not based on the infringer’s profits did not make it an

unreasonable award. See State Indus., 883 F.2d at 1580, 12

USPQ2d at 1031 (“The determination of a reasonable royalty ...

is based not on the infringer’s profit margin [; t ]here is no rule that

a royalty be no higher than the infringer’s net profit margin.”);

Stickle v. Heublein, Inc, 716 F.2d 1550, 1563, 219 USPQ 377, 387

(Fed. Cir. 1983) (royalty need not be less than price of infringing

unit). Furthermore, the fact that the award was based on and was a

significant portion of the patentee’s profits also does not make the

award unreasonable. The language of the statute requires “dam-

ages adequate to compensate,” which does not include a royalty

- 28a -

that a patentee who does not wish to license its patent would find

unreasonable. See Del Mar, 836 F.2d at 1328, 5 USPQ2d at 1261

(“[The] imposition on a patent owner who would not have

licensed his invention for [a certain] royalty is a form of compul-

sory license, against the will and interest of the person wronged, in

favor of the wrongdoer.”). Moreover, what an infringer would

prefer to pay is not the test for damages. See TWM, 789 F.2d at

900, 229 USPQ at 528 (that the parties might have agreed to a

lesser royalty is of little relevance, for to look only at that question

would be to pretend that the infringement never happened; it

would also make an election to infringe a handy means for

competitors to impose a compulsory license policy upon every

patent owner).

We conclude that the district court made no legal error and was

not clearly, erroneous in determining the reasonable royalty rate.

Accordingly, we affirm the trial court’s calculation of a reasonable

royalty rate. However, because we vacate the court’s decision to

include dock levelers in the royalty base, we remand for a

redetermination of damages based only on the sale of the infringing

restraints and not on the restraint-leveler packages.

B.

Rite-Hite’s Cross Appeal

Rite-Hite and the ISOs sought damages based on lost profits at

the retail level for ADL-100 and MDL-55 restraints and dock

levelers. The district court denied the award on the basis that both

Rite-Hite and the ISOs failed to meet their evidentiary burden of

proving lost profits. Rite-Hite has not persuaded us that the court’s

decision was erroneous. As for the ISOs, this issue is mooted by the

above rulings.

Rite-Hite also argues that the district court erred in awarding

interest at a simple rather than a compound rate because, as a

matter of law, prejudgment interest must be compounded. We

- 29a -

disagree. It has been recognized that “an award of compound

rather than simple interest assures that the patent owner is fully

compensated.” Fromson v. Western Litho Plate & Supply Co., 13

USPQ2d 1856, 1862 (E.D. Mo. 1989), affd mem., 909 F.2d 1495

(Fed. Cir. 1990). However, the determination whether to award

simple or compound interest is a matter largely within the

discretion of the district court. Gyromat Corp. v. Champion Spark

Plug Co., 735 F.2d 549, 557, 222 USPQ 4, 10 (Fed. Cir. 1984)

(declining to rule that prejudgment interest must be compounded

as a matter of law). Rite-Hite has not persuaded us that the court

abused its discretion in awarding interest at a simple rate.

CONCLUSION

On Kelley’s appeal, we affirm the district court’s decision that

Rite-Hite is entitled to an award of lost profit damages based on its

lost business in ADL-100 restraints. We affirm the court’s determi-

nation of the reasonable royalty rate. We vacate the awards to the

ISOs and vacate the damage award based on the dock levelers. We

remand for the court to dismiss the ISOs as plaintiffs and

recalculate damages to Rite-Hite. On Rite-Hite’s cross-appeal, we —

affirm.

COSTS

Each party will bear its own costs of this appeal.

AFFIRMED-IN-PART, VACATED-IN-PART, and

REMANDED

- 30a -

United States Court of Appeals for the Federal Circuit

Nos. 92-1206, -1260

RITE-HITE CORPORATION, ACME Dock SPECIALISTS, INC.,

ALLIED EQUIPMENT CorpP., APPLIED HANDLING, INc.,

ANDERSON MATERIAL HANDLING Co., BLock-Dickson, INC.,

ROBERT LUND d/b/a/ HMH COMPANY, HOJ ENGINEERING &

SALES Co., INc., JoHNSON EQUIPMENT Co., JOHNL &

ASSOCIATES, INC., KELLER EQUIPMENT Co., INC., LOADING

Dock EQUIPMENT, INC., METRO Dock SPECIALISTS, INC.,

McCormick EQuIPMENT COMPANY, INC., Mip-SouTH-Dock

SYSTEMS, INC., HARRY MONOHAN, NIEHAUS INDUSTRIAL

SALES, INC., NORTHWAY MATERIAL HANDLING Co., INc.,

PEMCO MATERIAL HANDLING, INc., R.B. CURLIN, INC., RICE

EQUIPMENT COMPANY, STOKES EQUIPMENT COMPANY, INC.,

ROBERT SOPER LIMITED, TIMBERS & ASSOCIATES, INC.,

TODD EQUIPMENT CORPORATION, THAYER SYSTEMS, INC..,

and

W.E. CARLSON CORPORATION,

Plaintiffs/Cross-Appellants,

¥

KELLEY COMPANY, INC.,

Defendant/Appellant.

NIEs, Circuit Judge, with whom ARCHER, Chief Judge, SMITH,

Senior Circuit Judge, and MAYER, Circuit Ju

dge join, dissenting-

in-part.

-3la-

I.

SUMMARY

The majority uses the provision in 35 U.S.C. § 284 for “dam-

ages”’ as a tool to expand the property nights granted by a patent.

J dissent.

No one disputes that Rite-Hite is entitled to “full compensation

for any damages suffered as a result of the infringement.” General

Motors Corp. v. Devex Corp., 461 U.S. 648, 653-54 (1983).

“Damages,” however, is a word of art. “Damages in a legal sense

means the compensation which the law will award for an injury

done.” Recovery in Patent Infringement Suits: Hearings on

H.R. 5231 [later H.R. 5311] Before the Committee on Patents,

79th Cong., 2nd Sess. 9 (1946) (statement of Conder C. Henry,

Asst. Comm’r of Patents) (hereinafter “House Hearings”). Thus,

the question is, “What are the injumes for which full compensation

must be paid?”’.

— The majority divorces “actual damages” from injury to patent

rights.' The majority holds that a patentee is entitled to recover its.

lost profits caused by the infringer’s competition with the paten-

tee’s business in ADL restraints, products not incorporating the

invention of the patent in suit but assertedly protected by other

unlitigated patents. Indeed, the majority states a broader rule for

the award of lost profits on any goods of the patentee with which

the infringing device competes, even products in the public

domain.

'The term “actual damages” is used to distinguish from an award based on a

hypothetical reasonable royalty. In the majority view, this dissent “confuses” the

patent right to exclude with the separate determination of actual damages for

patent infringement. Contrary to the majority, both determinations depend on

injury to patent rights. The patent defines the metes and bounds of legal injury.

As the Supreme Court stated in Continental Paper Bag Co. v. Eastern Paper Bag

Co., 210 U.S. 405, 430 (1908): “From the character of the right of the patentee

we may judge of his remedies.” The majority and the dissent do not merely

quibble over “line-drawing” by reason of “remoteness” of an injury but rather

fundamentally disagree over the legal scope of the market protected by a patent.

- 32a -

*

UN ah ig i is preg

I would hold that the diversion of ADL-100 sales is not an injury

to patentee’s property rights granted by the °847 patent. To

constitute legal injury for which lost profits may be awarded, the

infringer must interfere with the patentee’s property right to an

exclusive market in goods embodying the invention of the patent in

suit. The patentee’s property rights do not extend to its market in

other goods unprotected by the litigated patent. Rite-Hite was

compensated for the lost profits for 80 sales associated with the

MDL-55, the only product it sells embodying the ’847 invention.

That is the totality of any possible entitlement to lost profits. Under

35 U.S.C. § 284, therefore, Rite-Hite is entitled to “damages”

calculated as a reasonable royalty on the remainder of Kelley’s

infringing restraints.

I also disagree that the calculations of a reasonable royalty may

be based on a percentage of Rite-Hite’s lost profits. Under 35

U.S.C. § 284, a reasonable royalty must be attributed to Kelley’s

“use of the invention.” A royalty must be based on the value of the

patented hook, not on other features in the infringing device, e.g.,

the motors, which form no part of the patented invention used by

Kelley. Further, the trial court discounted or excluded significant

evidence and otherwise improperly calculated a reasonable royalty

rate.

Accordingly, for the reasons more fully presented below, I

dissent from the majority on these issues. I concur in the result of

part AIl and join part AIII. I take no position on the cross-appeal

regarding interest (part B) which is irrelevant to this dissent.

Il.

LOST PROFITS

As a matter of legal analysis, the majority treats the issue of

“damages” for a patentee’s lost trade in competitive goods not

embodying the invention of the patent in suit as one of first

- 33a-

impression. It is not. The following outline sets out the established

law:

(1) Patent “damages” are limited to legal injury to prop-

erty rights created by the patent, not merely causation in fact.

(2) Under precedent in 1946, a patentee was entitled to

recover, either at law or in equity, only the profits attributable

to the invention. A patentee’s property rights were limited to

its exclusivity in the market for the patented goods in suit.

“‘Damages” were awardable only for injury to that trade, and

only to the extent of the contribution of the invention to

profits. Apportionment of profits and the entire market value

rule refiect these principles. Injury to the patentee’s trade in

other competitive products was deemed an indirect loss and

not compensable. “Foreseeability” was not the test for legal

injury for patent infringement.

(3) In 1946, Congress eliminated the remedy of an equita-

ble accounting for a defendant’s profits and reenacted the

provision for “damages” in 1946 and 1952. Congress made no

change in the precedential law of “damages” except for -

prejudgment interest.

(4) Since 1946, the Supreme Court has not overturned its

precedent on “damages.” Under the entire market value rule

applicable to lost profits awards, a patentee must prove the

invention in suit created consumer demand for the patented

and infringing products.

(5) The majority’s decision creates a conflict with the law

of patent “damages” in all other circuits.

(6) The majority decision cannot be reconciled with other

provisions of the patent statute or with public policies.

- 34a -

A. The Insufficiency of “But-For” as the Sole Test

As a preliminary matter, I wish to state my reasons for rejecting

the arguments made by appellee Rite-Hite in support of the district

court’s judgment. The district court held, and Rite-Hite argues on

appeal, supported by the amici, that the only restriction on the

award of “actual damages” for patent infringement is proof of

causation in fact, that is, satisfaction of a “but-for” test.2 Under

that test, it would follow that Rite-Hite is entitled to any profits it

lost due to the infringer’s competition, whether it lost sales of

restraints embodying the invention in suit, or those protected by

other patents, or even products in the public domain, i.e., never

patented or the subject of expired patents. The district court

applied a “but-for” standard to award lost profits on dock levelers

as well.

In support of the district court’s ruling, Rite-Hite relies on the

statement in Aro Mfg. Co. v. Convertible T, op Replacement Co.,

377 U.S. 476 (1964), that a patentee’s damages under the statute

must be measured by “the difference between his pecuniary

condition after the infringement, and what his condition would

have been if the infringement had not occurred.” 377 US. at 507

(plurality opinion) (quoting Yale Lock Mfg. Co. v. Sargent, 117

U.S. 536, 552 (1886) ). However, one of the most common sources

of error occurs from quotations taken from opinions out of context.

One might just as well try to play music merely by reading the

lyrics. In Aro, the quoted statement was made in connection with

limiting the amount of damages which could be recovered. As

? Rite-Hite Corp. v. Kelley Co., 774 F. Supp. 1514, 1537, 21 USPQ2d 1801, 1819

(E.D. Wis. 1991):

In order to recover lost profits damages, “a patentee must show a reasonable

probability that, but for the infringement, it would have made the sales that were

made by the infringer.” Jd.; see also Panduit Corp. v. Stahlin Bros. Fibre Works,

575 F.2d 1152, 197 U.S.P.Q. 726 (6th Cir. 1978). The issue of whether a court

should award lost profits damages or a reasonable royalty under § 284 thus turns

primarily upon the quality of plaintiffs’ proof of lost profits. Neither § 284 nor

controlling case law restricts the recovery of lost profits damages any further.

- 35a -

further explained respecting damages for contributory

infringement:

[ A]fter a patentee has collected from or on behalf of a direct

infringer damages sufficient to put him in the position he

would have occupied had there been no infringement, he

cannot thereafter collect actual damages from a person liable

only for contributing to the same infringement.

Aro, 377 U.S. at 512. The quotation from Aro on which Rite-Hite

relies simply precludes double recovery. Aro does not mandate that

a “but-for” test is the only restriction on recovery of patent

infringement damages. Nor does Aro endorse the expansive view of

damages adopted by the majority. In rejecting the patentee’s

damages theory, the opinion stated, “It would enable the patentee

to derive a profit not merely on unpatented rather than patented

goods — an achievement proscribed by the Motion Picture Patents

[243 U.S. 502] and Mercoid [320 U.S. 661] cases — but on

unpatented and patented goods.” 377 U.S. at 510 (plurality)

(emphasis in original).

Rite-Hite’s principal authority from this court for its “but-for” _

theory is Lam, Inc. v. Johns-Manville Corp., 718 F.2d 1056, 219

USPQ 670 (Fed. Cir. 1983). The Lam rule, according to Rite-

Hite, similarly requires only that the court answer the question:

“Had the Infringer not infringed, what would Patent Holder ...

have made?’ ” Lam, 718 F .2d at 1064, 219 USPQ at 677 (quoting

Aro, 377 U.S. at 507). However, lost profits in Lam were awarded

for interference with the patentee’s sales of lamps which were “the

embodiment of the claimed invention.” Lam, 718 F.2d at 1059,

219 USPQ at 671. In Lam, indeed, in all of our previous decisions

on “lost profits,” we were addressing the factual issue of whether

the patentee was entitled to its lost profits by reason of the

infringer’s diversion of the patentee’s sales of products embodying

- 36a -

the invention of the infringed patent.’ The issue of recovery for

losses related to the marketing of a patentee’s competitive product

protected, if at all, under a different patent, was not involved.

Over centuries of judge-made law, the term “damages”’ has

become a word of art in the common law carrying both factual and

legal limitations. The legal limitations (frequently called “proxi-

mate cause,” an unfortunate expression because of its confusing

similarity to a but-for test) must be determined as a matter of law

by the judge. W. Page Keeton, et al., Prosser and Keeton on the

Law of Torts § 41 (Sth ed. 1984). Causation in fact of an injury i.e.,

the but-for test) is applied after the legal determination is made

that the asserted injury is a type which is legally compensable for

the wrong. The but-for determination is a factual matter for the

jury (or the judge in a bench trial). Thus, the common law term

“damages” does not encompass any and all economic injury that

one may suffer in fact from a wrong. Also, contrary to the district

court’s view, “proximate” or “legal” causation of patent damages is

not merely a more closely scrutinized causation in fact test

determined by “the quality of plaintiffs’ proof.” 774 F. Supp. at

1537, 21 USPQ at 1819. In connection with a tort created by a

federal statute, the public purpose of the statute and the likely

intent of Congress are the overriding considerations respecting the

types of injuries for which damages may legally be awarded.

Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 274

(1992); Associated Gen. Contractors, Inc. v. California State

* The majority also finds support for its decision here in decisions of this court

which applied a but-for test to determine liability for lost profits in connection

with the patentee’s business in goods embodying the patented invention in suit,

namely, State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1577, 12

USPQ2d 1026, 1028 (Fed. Cir. 1989), cert. denied, 493 U.S. 1022 (1990); Del

Mar Avionics, Inc. v. Quinton Instrument Co., 836 F.2d 1320, 1326, 5 USPQ2d

1255, 1260 (Fed. Cir. 1987); King Instrument Corp. v. Otari Co, 767 F.2d 853,

863, 226 USPQ 402, 409 (Fed. Cir. 1985), cert. denied, 475 U.S. 1016 ( 1986).

There was no question in those cases that the injury to a patentee’s business in

patented goods was compensable. The question was sufficiency of proof that the

patentee would have made the sales but for the infringement.

- 37a -

Council of Carpenters, 459 U.S. 519, 538-40 (1983); see also

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489

(1977) (‘‘[Plaintiff under section 7 of the Clayton Act] must

prove more than injury causally linked to an illegal presence in the

market. Plaintiffs must prove antitrust injury, which is to say injury

of the type the antitrust laws were intended to prevent.”) Courts

must be careful to discern and not exceed the purpose which the

legislature intended. Cf Keeton, et al., supra, § 36.

The term “damages” in the patent statute must be interpreted in

light of the familiar common law principles of legal or proximate

cause associated generally with that term. In rejecting a “but-for”

standard for determining “damages” in the Clayton Act,’ the

Supreme Court observed:

[A] number of judge-made rules circumscribed the availabil-

ity of damages recoveries in both tort and contract litiga-

tion — doctrines such as foreseeability and proximate cause,

directness of injury, certainty of damages, and privity of

contract. Although particular common-law limitations were

not debated in Congress, the frequent references to common- -

law principles imply that Congress simply assumed that

antitrust damages litigation would be subject to constraints

comparable to well-accepted common-law rules applied in

comparable litigation.

Associated Gen. Contractors, 459 U.S. at 532-33 (citations

omitted).

“Section 4 of the Clayton Act, 15 U.S.C. § 15 (1988) provides (emphasis

added):

[A]ny person who shall be injured in his business or property by reason of

anything forbidden in the antitrust laws may sue therefore in any district court of

the United States in the district in which the defendant resides or is found or has

an agent, without respect to the amount in controversy, and shall recover

threefold the damage by him sustained, and the cost of suit, including a

reasonable attorney’s fee.

- 38a -

The Supreme Court has recently applied a similar analysis of the

civil action damages provision of RICO. Holmes v. Securities

Investor Protection Corp., 112 S. Ct. 1311, 1316-19 (1992). As

stated in Holmes respecting the overriding necessity for “proxi-

mate cause” for an injury to be compensable under a statute

awarding “damages”:

[A] showing [must be made] not only that the defendant's

violation [of RICO] was a ‘but for’ cause of [the plaintiff's]

injury, but was the proximate cause as well. [As further

explained] proximate cause [is used] to label generically the

judicial tools used to limit a person’s responsibility for the

consequences of that person’s own acts.

112 S. Ct. at 1316-18 (emphasis added).°

Under this Supreme Court precedent, the law is clear that

proximate cause is applied as a legal limitation on “damages” in

connection with the statutory torts which the Court has considered.

A “‘but-for’ test tells us nothing about whether the injury is /egally

one which is compensable. As above stated, the lack of proximate

causation will preclude recovery for certain losses even though a

“but-for” standard of injury in fact is satisfied. See also Blue Shield

of Va. v. McCready, 457 U.S. 465, 476-77 (1982) (Clayton Act);

Davis v. AVCO Fin. Servs., Inc., 739 F.2d 1057, 1067 (6th Cir.

* RICO’s civil action provision, 18 U.S.C. § 1964(c) (1988), reads (emphasis

added):

Any person injured in his business or Property by reason of a violation of section

1962 of this chapter may sue therefore in any appropriate United States district

court and shall recover threefold the damages he sustains and the cost of the suit,

including a reasonable attorney’s fee.

* These principles were stated in the context of a party’s standing to sue. However,

the Court drew upon principles respecting the limitation of “proximate cause”

on recoverab': ‘“amages. See Associated Gen. Contractors, 459 U.S. at 536 (“It

is common ground [ respecting damages and standing} that the judicial remedy

cannot encompass every conceivable harm that can be traced to alleged

wrongdoing.”’)

- 39a -

1984), cert. denied, 470 U.S. 1005 (1985) (“but-for” test may not

be equated with “proximate cause”); Keeton, et al., supra, at 42.

Rite-Hite and the majority treat lost profits as the legal injury.

However, lost profits is a way to measure compensation for a legal

injury. Lost profits is not itself the legal injury. No rational basis is

suggested by Rite-Hite or the amici for applying a different

interpretation to the statutory term “damages” in connection with

the tort of patent infringement. No legislative history even hints

that patentees are so favored that a special or more expansive

meaning was intended for patent “damages.” A “but-for” test for

“damages,” which would mandate that all types of economic injury

to a patentee’s business traceable to the infringement are compen-

sable, is as legally deficient a standard for patent infringement

“damages” as for “damages” under the Clayton Act or RICO.

Causation in fact is not the sole test for determining compensable

“damages” under 35 U.S.C. § 284.

That said, however, merely brings us to the issue of what are the

legal limits on “damages” for patent infringement.

As will be shown, precedent before 1946 unequivocally estab-

lished that compensable lost profits were restricted to those the

patentee would have made from commercializing the invention.

Further, Congress reenacted the provision for “damages” with that

understanding.

B. Statutory Provisions

The question raised in this appeal is one of statutory construc-

tion, but it is of constitutional dimension. Article I, section 8 of the

Constitution provides for a patent system which will “promote the

Progress . . . of the useful Arts, by securing for limited Times to . . .

Inventors the exclusive Right to their Discoveries.”” Congress has

provided in 35 U.S.C. § 284 (1988):

Upon finding for the claimant the court shall award the

claimant damages adequate to compensate for the infringe-

- 40a -

ment, but in no event less than a reasonable royalty for the use

made of the invention by the infringer, together with interest

and costs as fixed by the court.

When the damages are not found by a jury, the court shall

assess them. In either event the court may increase the

damages up to three times the amount found or assessed.

The court may receive expert testimony as an aid to the

determination of damages or of what royalty would be

reasonable under the circumstances.

What stimulus, what financial rewards did Congress intend by the

term “damages” to effect the purpose of promoting progress in the

useful Arts?

The majority concludes that Congress enacted expansive lan-

guage in § 284, providing “only a lower limit and no other

limitation.” Slip op. at 8.’ The majority finds support for its

interpretation in the statement in Devex Corp.,461 U.S. at 653-54,

that Congress sought to “ensure that the patent owner would, in

fact, receive full compensation for ‘any damages’ [the patentee ]

suffered as a result of infringement” (quotation marks in original).

The majority also states that the Devex Court cautioned against

imposing limitations on patent infringement damages that were not

explicit. Jd. at 653. While true, that “caution” was only part of the

Court’s analysis. In Devex, the question was the interpretation of

the provision for “interest” added in 1946, later codified in § 284,

with respect to which the Court explained:

This is not a case in which Congress has -eenacted statutory

language that the courts had interpreted in a particular way.

In such a situation, it may well be approoriate to infer that

’ The majority construes “adequate” as an expansive tern. If anything the term

“adequate” suggests moderation, the standard definiton of the term being

7 sufficient,” Webster's Ninth New Collegiate Dictionary, 56 (9th ed.

1983), or even “barely sufficient,” The American Heritage Dictionary 15

(10th ed. 1981).

-4la-

Congress intended to adopt the established judicial

interpretation.

Id.

The provision for ““damages” in § 284, unlike that for “interest,”

was reenacted language. While the statutory remedies have been

modified over the years in other ways, a patentee has been entitled

to recover actual damages at law since the beginning of the

nineteenth century. See Seymour v. McCormick, 57 U.S. (16

How.) 480, 488-89 (1854), for a review of the 1836 Act and earlier

statutory provisions. See also Irah H. Donner, BIC Leisure v.

Windsurfing, 4 Fed. Circuit Bar J. 167 (1994).

Immediately prior to 1946, the patent statute provided for

recovery of the “damages” the patentee sustained, a remedy at law,

which could, in appropriate cases, be the amount of a patentee’s

lost profits by diversion of its sales of patented goods, the amount of

an established royalty or a reasonably royalty.® In addition, a

patentee was entitled to an equitable accounting for profits made

by the infringer from the invention. To simplify proceedings, both

remedies were made available by statute in an equity court where

infringement suits were generally brought in order to obtain

injunctive relief. Patent Act of 1870, ch. 230, 16 Stat. 206-7

(1870). The provision for “damages” and for an accounting for

profits did not, however, allow double recovery. Common law

“damages” were recovered to the extent the amount exceeded a

defendant’s profits.’

“By the 1946 amendments, [citation omitted] the statute was

changed to its present form, whereby only ‘damages’ are recover-

able.” Aro Mfg. Co., 377 U.S. at 505. This was effected by

* Other types of actual damages, e.g., price erosion on the patentee’s patented

goods, are not involved here.

* See Georgia-Pacific Corp. v. United States Plywood Co., 243 F. Supp. 500, 516-

46, 146 USPQ 228, 242-54 (S.D.N.Y. 1965), for an extended analysis of

statutory remedies in successive patent statutes.

- 42a -

eliminating an accounting for an infringer’s profits. A specific

provision for “damages” measured as a reasonably royalty was

added, as well as a provision for prejudgment interest. Act of

Aug. 1, i946, ch. 726, § 1, 60 Stat. 778 (codified as amended at 35

U.S.C. §§ 281, 283-286, 290 (1988) ). The 1952 codification of the

patent statute did not change the substance of allowable “dam-

ages.” Its stated purpose was merely “reorganization in language to

clarify the statement of the statutes.” Aro, 377 US. at 505 n.20

(quoting H.R. Rep. No. 1923, 82d Cong., 2d Sess. at 10, 29

(1952)). Thus, again “damages” is reenacted language and it

would be reasonable to infer that Congress intended to adopt the

established judicial interpretation. Jd.

One need not rely on mere inference respecting the meaning

Congress intended for the term “damages.” As explained to

Congress in hearings on the 1946 statute by officials of the Patent

Office and other witnesses endorsing the bill, “Damages in a legal

senseé means the compensation which the law will award for an

injury done.” House Hearings at 9 (Henry statement). Respecting

the restriction of profits to those created by the invention, all

agreed “those [are] the only profits to which the patentee is

entitled.” Jd. at 3 (Fish letter introduced by Hon. Robert K.

Henry, Member of Congress). Those statements correctly reflect

the pre-1946 meaning of “damages” in the patent statute.

C. Property Rights Granted by Patent

An examination of pre-1946 Supreme Court precedent discloses

that the legal scope of actual damages for patent infringement was

limited to the extent of the defendant’s interference with the

patentee’s market in goods embodying the invention of the patent

in suit. This limitation reflects the underlying public policy of the

patent statute to promote commerce in new products for the

public’s benefit. More importantly, it protects the only property

rights of a patentee which are protectable, namely those granted by

the patent. The patentee obtained as its property an exclusive

- 43a -

market in the patented goods. “[I]nfringement was a tortious

taking of a part of that property.” Dowagiac Mfg. Co. v. Minnesota

Moline Plow Co., 235 U.S. 641, 648 (1915). In theory the infringer

was a trustee of profits it made off the invention and/or was liable

for lost profits the patentee would have made from its own sales of

the patented goods.

In Continental Paper Bag Co. v. Eastern Paper Bag Co., 210

U.S. 405, 430 (1908), the Supreme Court advised: “From the

character of the right of the patentee we may judge of his

remedies.” Until the Act of 1952, the right granted to a patentee

was stated in terms of the exclusive right to make and use and vend

the protected invention.'° This language tracks the English Statute

of Monopolies (1624) under which the Crown did give a monopoly

to an inventor to make and work certain new manufactures within

the realm for a limited period.'' The term “invention” itself meant

the establishment of a new trade or industry. Thus, under the

Statute of Monopolies, an “inventor” was anyone who developed

an industry previously unknown in England. The period of exclu-

sivity was given for the inventor to reap his reward in the

marketplace without competition while thereby training others to

make and use his invention at the end of the patent term.'* Indeed,

failure to exploit in England was a basis for cancellation of the

grant.

In contrast, in the United States, the grant of a patent did not

convey to the inventor a right to make, use and vend his invention

© See, e.g., Acts of 1790, 1793, and 1870.

'' The Statute of Monopolies remained the only statute on patents in England well

into the 19th Century.

'2 See Edward C. Walterscheid, The Early Evolution of the United States

Patent Law: Antecedents (Part 2), 76 J. Pat. & Trademark Off. Soc’y,

849, 870-71 (1994). The original period of exclusivity was 14 years.

Why that term was provided is unknown. It may have some relationship

to the terms of successive apprenticeships. /d.

- 44a -

despite the statutory language originally to that effect. In interpret-

ing, a patentee’s rights in Crown Die & Tool Co. v. Nye Tool &

Machine Works, 261 U.S. 24, 26 (1923), the Supreme Court

explained that an inventor has a natural night to make, use and sell

his invention, and that a patent augments an inventor’s position by

making that natural right exclusive for a limited time. The

Statutory language was interpreted to give a right to preclude others

from interfering with the patentee’s exclusivity in providing the

patented goods to the public. Jd. at 34.'3

An inventor is entitled to a patent by meeting the Statutory

requirements respecting disclosure of the invention. Prior commer-

cialization of the invention has never been a requirement in our law

to obtain a patent. An inventor is merely required to teach others

his invention in his patent application. Thus, when faced with the

question of whether a patentee was entitled to enjoin an infringer

despite the patentee’s failure to use its invention, the Supreme

Court held for the patentee. Continental Paper Bag, 210 U.S. at

424-430. Congress provided a right to exclusive use and to deny

that privilege would destroy that right. Jd. at 430. An injunction

preserves the patentee’s exclusive right to market embodiments of

the patented invention.

These clearly established principles, however, do not lead to the

conclusion that the patentee’s failure to commercialize plays no

role in determining damages. That the quid pro quo for obtaining a

patent is disclosure of the invention does not dictate the answer to

the question of the legal scope of damages. The patent system was

not designed merely to build up a library of information by

disclosure, valuable though that is, but to get new products into the

marketplace during the period of exclusivity so that the public

° The current statute provides expressly in 35 U.S.C. § 154:

Every patent shall contain... a grant to the patentee . . . of the right to

exclude others from making, using, or selling the invention throughout

the United States.

- 45a -

receives full benefits from the grant. The Congress of the fledgling

country did not act so quickly in enacting the Patent Act of 1790

merely to further intellectual pursuits. As explained in an early

text, “The patent laws promote the progress in different ways,

prominent among which are [inter alia] by protecting the invest-

ment of capital in the development and working of a new invention

from ruinous competition till the investment becomes remunera-

tive.” Simonds, Summary of the Law of Patents 9 (1883). Better

or cheaper products in the marketplace which promote competi-

tion is the goal.

In Bement v. National Harrow Co., the Supreme Court recog-

nized that the patent system was designed to stimulate the

patentee to put new products into the market where the public

would benefit from them:

“If [the patentee] see fit, he may reserve to himself the

exclusive use of his invention or discovery. If he will neither

use his device nor permit others to use it, he has but

suppressed his own. That the grant is made upon the reasona-

ble expectation that he will either put his invention to practical

use or permit others to avail themselves of it upon reasonable ~

terms, is doubtless true. This expectation is based alone upon

the supposition that the patentee’s interest will induce him to

use, or let others use, his invention. The public has retained no

other security to enforce such expectations.”

186 U.S. 70, 90 (1902) (quoting Heaton-Peninsular Co. v. Eureka

Specially Co., 77 F. 288, 294, 47 U.S. App. 146, 160 (6th Cir.

1896)) (emphasis added). Other statements of the Court are of

like import. In Woodbridge v. United States, 263 U.S. 50, 55-56

(1923), the Court opined: “Congress relies for the public benefit to

be derived from the invention during the monopoly [i.e., the term

of a patentee’s exclusive market] on the natural motive for gain in

the patentee to exploit his invention and to make, use and vend it or

its products or to permit others to do so, for profit.” The grant of a

period in which a patentee has exclusivity in commercialization of

- 46a -

its patented product without competition from infringing products

of others is provided in order to attract the necessary capital to start

up a new business. Exclusivity in commercialization enables a

patentee to recoup its investment in research, production, and

marketing a new product. The merits of the invention will

determine the patentee’s just reward from the public.

Thus, a patentee may withhold from the public the benefit of use

of its invention during the patent term, and the public has no way to

withdraw the grant for nonuse. Like the owner of a farm, a patentee

may let his property lay fallow. In doing so, “he has but suppressed

his own.” Bement, 186 U.S. at 90. But it is anomalous to hold that

Congress, by Providing an incentive for the patentee to enter the

market, intended the patentee to be rewarded the same for letting

his property lay fallow during the term of the patent as for making

the investment necessary to commercializing a new product or

licensing others to do so, in order that the public benefits from the

invention. The status quo may serve the patentee’s interest, but

that is not the only consideration. The patent grant “was never

designed for [an inventor’s] exclusive profit or advantage.”

Kendall v. Winsor, 62 U.S. (21 How.) 322, 328 (1858).

D. Injury to a Patentee’s Market in Unprotected Goods is nota

Patent Infringement Injury

The question of recovery of lost profits to compensate a patentee

for injury to its business in competitive products not protected by

the patent in suit (hereinafter “unprotected goods”) is not a new

theory of damages. Over a hundred years ago, the Supreme Court

expressed its view that damages in the form of lost profits must be

based upon injury to the patentee’s trade in products embodying

the patented invention. As stated in Crosby Steam Gage & Valve

Co. v. Consolidated Safety Valve Co., 141 US. 441, 452-53 (1891)

(emphasis added):

If there had been an award of damages, and the loss of trade

by the plaintiff, in consequence of the competition by the

- 47a -

defendant, had been an element entering into those damages,

it would have been a material fact to be shown by the plaintiff

that it was putting on the market goods embodying the

[patented] invention.

Faced with that statement by the Supreme Court, few patentees

have had the temerity to seek damages for loss of trade in

competitive unprotected devices and none have been successful in

any other circuit.

Since Seymour v. McCormick, 57 U.S. (16 How.) 487 (1854),

it had been an accepted tenet that actual “damages” depended on

the infringer’s interference with the patentee’s commercial use of

its invention either by exploiting the monopoly himself (that is,

satisfying demand with his own patented goods) or by licensing the

patent. Yale Lock Mfg. Co. v. Sargent, another frequently cited

damages case, rests on the tenet that the infringement interfered

with the patentee’s marketing of the patented goods:

As the plaintiff, at the time of the infringement, availed

himself of his exclusive right by keeping his patent a monop-

oly, and granting no licenses, the difference between his

pecuniary condition after the infringement, and what his

condition would have been if the infringement had not

occurred, is to be measured, so far as his own sales of locks are

concerned, by the difference between the money he would

have realized from such sales if the infringement had not

interfered with such monopoly, and the money he did realize

from such sales.

117 U.S. at 552-53 (emphasis added). Absent a patentee’s use of

its invention or proof of an established license fee, infringement of

a patent resultedin nominal damages. Rude v. Westcott, 130 U.S.

152, 165-67 (1889); 3 William C. Robinson, The Law of Patents

§ 1052 (1890). See 1 T. Sedwick, Measure of Damages 80 (1880)

(general principle of nominal damages applied to patent

infringement).

- 48a -

Commercialization of a patented invention can be accomplished

by the patentee either (1) itself making, using or selling an

embodiment of the invention or (2) licensing others to do so.

Seymour, 57 U.S. (16 How.) at 489-90. Calculation of actual

“damages” depended upon which of those two modes the patentee

chose to secure the financial benefits from its invention. See

McCormick vy. Seymour, 15 F. Cas. 1329, 1335 (No. 8727)

(C.C.N.D.NLY. 1854) (on remand). “Hence the first point on

which proof should be offered in reference to actual damages is the

use made of his patent privilege by the plaintiff: the second is the

effect produced upon the value of such use by the wrongful acts of

the defendant.” 3 Robinson § 1054 at 324. Evidence was not

admissible of losses over the amount the patentee would have

cleared by working or licensing the invention. Jd § 1061 at 339.

Carter v. Baker, 5 F. Cas. 195, 201-02 (No. 2,472) (C.C.D. Cal.

1871). As stated in 3 Robinson § 898 at 56, respecting damage

awards:

The interest of the patentee is represented by the emoluments

which he does or might receive from the practice of the

invention by himself or others. Hence acts of infringement

must attack the right of the patentee to those emoluments.

An attempt to recover actual damages for lost sales of a

competitive unprotected product was made in Metallic Rubber

Tire Co. v. Hartford Rubber Works Co., 275 F. 315, 323-24 (2d

Cir.), cert. denied, 257 U.S. 650 (1921). The Second Circuit held

there could be no award of lost profits where the patentee, a maker

of competitive tires, never manufactured and sold a tire containing

the invention of the patent in suit. Similarly, in Carter, 5 F. Cas. at

201-02, the court instructed the jury that a patentee’s loss by

reason of its inability to sell plows other than those embodying the

patent infringed were “[r]Jemote consequential damages” and not

recoverable. As further explained in Carter, 5 F. Cas. at 202, the

award of lost profits must be the “direct and legitimate fruits of

that patent. They may have sustained damages from [loss of sales

- 49a -

of a competing unprotected device], but they are too remote.” In

Standard Mailing Machines Co. v. Postage Meter Co., 31 F.2d 459

(D. Mass. 1929), the court limited the patentee to a reasonable

royalty award because the patentee, although marketing a compet-

itive product, was not “in the market during the infringing period,

prepared to sell machines embodying the patented invention.” Jd.

at 462. In McComb v. Brodie, 15 F. Cas. 1290, 1295 (No. 8,708)

(C.C.D. La. 1872), the court instructed the jury to award lost

profits only if the patentee was ready to supply the market with

patented goods and the infringer diverted those sales. See also

Goodyear v. Bishop, 10 F. Cas. 642 (No. 5,559) (C.C.S.D.N.Y.

1861) (jury charge); Buerk v. Imhaeuser, 4 F. Cas. 594, 595

(No. 2,107) (C.C.S.D.N.Y. 1876) (equity court); Spaulding v.

Page, 22 F. Cas. 892, 895 (No. 13,219) (C.C.D.Cal 1871).

Additionally, the commentary over the years supports this

position. The current statement in 8 Ernest Bainbridge Lipscomb,

Walker on Patents § 27:22 (1989) has been essentially unchanged

since at least the 1940’s, before the present statute was enacted:

Indirect consequential damage cannot be recovered in a

patent infringement action. [Footnote omitted. See, eg. —

Velo-Bind, Inc. v. Minnesota Mining & Mfg. Co., 647 F.2d

965, 973, 211 USPQ 926, 934 (9th Cir. 1981).] The instances

in which such damages have been claimed are few, but it is

advisable to mention such injuries as might probably be held

to fall within such a category.

Pecuniary injury may result to a patentee from a particular

infringement, in that it caused him fo suffer competition and

consequent loss in business outside of the patent infringed; or

in that it so unexpectedly reduced the business in the patented

article as to make it necessary for him to sell unpatented

property at less than its real value, or to borrow money at more

than a proper rate of interest in order to meet his pecuniary

engagements; or in that it encouraged other persons to

infringe from whom, by reason of insolvency or other obstacle,

=~$0a -

no recovery can be obtained; or in that such infringement

caused the patentee so much trouble and anxiety that he

incurred loss from inability to attend to other business. But

pecuniary injury of any of these kinds would be such an

indirect consequential matter as not to furnish any part of a

proper basis for recoverable damages in an infringement suit.

[Emphasis added. ]

There is no dispute that parts of a patentee’s business not

directed to commercializing the patented invention may indirectly

benefit from the patentee’s ownership of that patent. An extant

patent of which a patentee makes little or no commercial use may

serve to impede competition in the field so that a patentee is able to

maintain its market position for the patentee’s already established

line of unprotected goods. However, where infringement of the

patent interferes with that indirect benefit from the patent, the

injury has heretofore been held to be an indirect consequential loss

and not recoverable.

E. Precedent Respecting the Apportionment of Profits and the

Entire Market Value Rule

The limitation of a patentee’s monetary recovery to profits

created by the invention is also reflected in the extensive pre-1946

caselaw on apportionment of profits and the correlative entire

market value rule. While patentees who commercialized the

invention of the patent in suit might recover some amount of

profits, the entire amount of profits would not be awarded where

the invention was not of an entirely new device but amounted only

to an improvement, unless the invention was the basis for demand

for the entire device. Similarly, in equity a patentee was limited to

an accounting for the defendants’ profits attributable to the

invention. See Dobson v. Dornan, 118 U.S. 10 (1886) (involving

both patentee’s lost profits and accounting for defendant’s profits;

apportionment required); Dobson v. Hartford Carpet Co., 114 U.S.

439, 444-46 (1885) (involving apportionment of the patentee’s lost

- 5la-

profits; patentee must show “that the profits and damages are to be

calculated on the whole machine for the reason that the entire

value of the whole machine, as a marketable article, is properly and

legally attributable to the patented feature... . [T]o attribute, in

law, the entire profit to the [invention ] to the exclusion of the other

merits, unless it is shown, by evidence, as a fact, that the profit

ought to be so attributed, not only violates the statutory rules of

‘actual damages’ and of ‘profits to be accounted for,’ but confounds

all distinctions between cause and effect.”); Garretson v. Clark,

111 U.S. 120 (1884) (Patentee must apportion profits between

patented and unpatented features or prove “damages are to be

calculated on the whole machine for the reason that the entire

value of the whole machine, as a marketable article, is properly and

legally attributable to the patented feature.”); Seymour, 57 U.S.

(16 How.) at 490 (same damage rule does not apply whether

invention covers an entire machine or an improvement); Keystone

Mfg. Co. v. Adams, 151 U.S. 139, 147-48 (1894) (serious

difficulties arise in determining measure of damages where “pat-

ented invention is but one feature in a machine embracing other

devices that contribute to the profits made by the defendant.’’).

The Supreme Court has long rejected the view that damages are

recoupable for the profit attributable to other patents embodied in

a competitive device of the patentee. Blake v. Robertson, 94 U.S.

728, 733, 734 (1877). Cf Yale Lock Co., 117 U.S. at 553

(patentee’s price-erosion award reduced where third party’s pat-

ented invention incorporated into infringing device).

Apportionment of profits so as to reflect the “fruits” of the

patent was the problem that prompted the 1946 amendments of

the statute. The legislative history repeatedly indicates that appor-

tionment required protracted expensive litigation for both parties

and, because it was virtually impossible to apportion profits with

any exactitude, frequently produced unfair results. Yet the profits

due to the invention are the only profits to which the patentee was

entitled unless the patentee could prove that the entirety of the

- §2a-

profits were due to the invention under the entire market value

rule. Westinghouse Elec. & Mfg. Co. v. Wagner Elec. & Mfg. Co.,

225 U.S. 604, 615 (1912). In Westinghouse, the Supreme Court

went on to hold that if the patentee did all it could to attempt to

apportion the defendant’s profits, the burden on apportionment

shifted to the defendant in equitable accountings. Congress was

told that, under the Westinghouse doctrine, the patentee “gets in

very Many cases enormously more than that to which he is really

entitled.” The elimination of equitable accountings, the most

commonly used remedy, was urged for that reason. House Hear-

ings at 3 (Fish letter). Congress was persuaded and deleted the

remedy of equitable accountings for the defendant's profits from

the statute. Aro, 377 U.S. at 505.

Respecting “damages” at law, in Dowagiac Mfg. Co., supra, the

Supreme Court endorsed the theory of a hypothetical reasonable

Toyalty as “damages” where the patentee could not prove actual

damages. This relief had been developed in several lower courts

because of the unfairness to the patentee who, despite infringe-

ment, received only nominal damages. 235 U.S. at 648-50. Where

actual damages in the form of recoupment of a patentee’s “lost

profits” or the amount of an established royalty could not be

proved, the Dowagiac Court held that the patentee “was entitled to

prove what would have been a reasonable royalty.” Dowagiac, 235

U.S. at 650. Thus, to receive more than nominal damages, proof of

actual losses was no longer required. Congress gave its specific

approval to a reasonable royalty as statutory “damages” by

enactment of the provision, “general damages... not less than a

reasonable royalty.”

The 1946 amendments provide no basis for the majority’s

expansive view that Congress intended a patentee to recoup all

* Although the Patent Act of 1922, 42 Stat. 392 (1922), contained no specific

provision for a reasonable royalty, it was interpreted to allow this form of

damages. See Georgia-Pacific Corp. v. United States Plywood, 243 F. Supp. at

519-20.

- 53a-

losses from infringement with “only a lower limit and no other

limitation.” Slip op. at 8. Indeed, Congress eliminated equitable

accounting which, under Westinghouse, had favored patentees.

Monetary relief was expanded to provide for the recovery of

prejudgment interest. Respecting other form of “damages,” Con-

gress left the law intact. Faulkner v. Gibbs, 199 F.2d 635, 638

(9th Cir. 1952). A patentee remained entitled to recover its own

lost profits only to the extent that they were directly created by the

invention of the patent in suit and, thus, were the fruit of the

invention. The scope of legal injury, that is, a patentee’s property

right to an exclusive market in patented goods, was not enlarged.

F. Post-1946 Precedent

The previously discussed decisions in Aro, which limited dam-

ages, and General Motors, which dealt with prejudgment interest,

provide the only direct guidance from the Supreme Court on

“damages” under the current statute. Neither overturns the

established precedent that a patentee is entitled to its own lost

profits only for diversion of sales which the patentee would have

made from its goods using the invention of the litigated patent. Nor

do they overturn the entire market value rule that the entirety of a

patentee’s lost profits may be recovered as “damages” only where

the patentee proves that use of the invention in suit in the

patentee’s and infringer’s goods creates consumer demand for the

entire product.

Between 1946 and 1982, every other circuit which addressed the

issue adhered to the basic tenet that a patent protects a patentee’s

market for its own goods embodying the invention and no other

market. Moreover, lost profits on an entire product were recover-

able only where the patented invention created the demand for that

product. The following cases are illustrative:

Second Circuit:

Electric Pipe Line, Inc. v. Fluid Systems, Inc., 250 F.2d 697,

699, 116 USPQ 25, 27 (2nd Cir. 1957) (Lost profits appropri-

ate since patentee and infringer “were the only suppliers of

this unique patented fuel storage and transportation system

... [and] but for [defendant’s] infringement, [patentee]

would have made all these installations.’’).

Third Circuit:

American Security Co. v. Shatterproof Glass Corp., 268 F.2d

769, 777, 122 USPQ 167, 174 (3d Cir.), cert. denied, 361 U.S.

902 (1959) (“Each patent gives its owner a monopoly in

respect to its disclosures, so much and no more. It is a grant of

the exclusive right to manufacture, use and sell the invention

which is disclosed. That invention is what the patent grant

protects by the monopoly, not that invention plus some

embellishment, improvement, or alternate product or process,

which also happens to be patented.”);

Devex Corp. v. General Motors Corp., 667 F.2d 347, 361, 212

USPQ 643, 655 (3rd. Cir. 1981) affd 461 U.S. 648 (1983)

(“Where a plaintiff itself uses the patented process in manu-

facturing, damages for infringement may take the form of lost

profits, and the burden is on the plaintiff to show their amount.

Where, as here, the party alleging infringement does not itself

manufacture or use the patented process, compensation may

take the form of a reasonable royalty for licensing the use of

the patent.”) (Citations omitted.) (The majority cites Su-

preme Court decision as support for a more expansive view. )

Fourth Circuit:

Marvel Specialty Co. v. Bell Hosiery Mills, Inc., 386 F.2d 287,

155 USPQ 545 (4th Cir. 1967) cert. denied 390 U.S. 1030

(1968) (Patentee manufacturer could recover only estab-

- §5a-

lished royalty for patented goods, not other established royalty

for patented goods plus improvements not covered by patent).

Fifth Circuit:

Baumstimler v. Rankin, 677 F.2d 1061, 1072, 215 USPQ 575,

584 (Sth. Cir. 1982) (“Since [patentee] did not manufac-

ture, sell or use the patented invention ... [patentee] techni-

cally had no lost profits”);

Livesay Window Co. v. Livesay Indus., Inc., 251 F.2d 469,

470, 116 USPQ 167, 168-89 (Sth Cir. 1958) (Lost profits

determined based on sales of patented invention by exclusive

licensee).

Sixth Circuit:

Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d

1152, 1156, 197 USPQ 726, 730 (6th Cir. 1978) (Patentee

manufacturer must prove lost profits by showing: “l) demand

for the patented product, 2) absence of acceptable noninfring-

ing substitutes, 3) his manufacturing and marketing capabil-

ity to exploit the demand [for the patented product], and

4) the amount of profits he would have made.”).’°

Seventh Circuit:

Union Carbide Corp. v. Graver Tank & Mfg. Co., 282 F.2d

653, 665-68, 127 USPQ 3, 12-14 (7th Cir. 1960), cert. denied,

'S The majority misstates the record and grossly distorts the Panduit test. First,

contrary to the majority’s statement that “Kelley does not challenge that Rite-

Hite meets the Panduit test,” slip op. at 11, Kelley’s supplemental brief at 11

states: “If the trial court’s decision is good law, then Panduit is not....

Affirming Rite-Hite v. Kelley will mean effectively overruling Panduit.” See

also Kelley’s opening brief at 14. Second, the Panduit factors were not met.

There is no proof anyone bought either the Rite-Hite or Kelley restraints

because of the patented hook technology and the ADL-100 itself is an

acceptable substitute not within the patent claims, ie, a noninfringing

acceptable substitute.

- 56a -

365 U.S. 812 (1961) (Upholding special master’s conclusion

of law which stated “Plaintiff . . . has failed to prove... [t]he

amount of its damage from loss of profits it would have made

on such additional sales of the patented composition”’).

See also In re Universal Research Lab., Inc. 203 USPQ 984,

989 (N.D. Ill. 1978).

Ninth Circuit:

Velo-Bind, inc. v. Minnesota Mining & Mfg. Co., 647 F.2d

965, 973, 21 USPQ 926, 933-94 (9th Cir.), cert. denied, 454

U.S. 1093 (1981) (patentee manufacturer of invention de-

nied lost profits on unpatented supplies: “where the patent

creates only part of the profits, damages are limited to that

part of the profits, which must be apportioned as between

those created by the patent and those not so created. [citation

omitted] The damages sustained by [patentee] are easily

apportioned between patented and unpatented lost sales.’’);

Faulkner v. Gibbs, 199 F.2d 635, 638 n.7, 95 USPQ 400, 402

n.7 (9th Cir. 1952) (‘“Where, however, the patentee has

himself engaged in the manufacture, use or sale of his

patented article, he may be awarded damages for his loss of

profits resulting from the infringement.”).'

Until this decision, the precedent of this court was consistent

with other circuits. Lost profits have not been awarded except

where the patentee lost sales of products in which the patentee

used the claimed invention found to be infringed. See Manville

'€ See also Note, Remedies Against Patent Infringement, 72 Harv. L. Rev. 328,

344-45 (1958) (“If a patentee who sells his invention discovers ... that an

infringer seller has diverted some of his potential sales,” such a patentee may

recover lost profits.); Note, Recovery in Patent Suits, 60 Colum. L. Rev. 840,

846-48 (1960) (“When a patentee has exploited his grant by manufacturing

and selling the patented article rather than licensing others to do so, profits lost

by the patentee as a direct result of an infringer’s competing sales may be the

measure of his damages.’’).

- 57a -

Sales Corp. v. Paramount Sys., Inc., 917 F.2d 544, 549-51, 16

USPQ2d 1587, 1591-92 (Fed. Cir. 1990); Kalman v. Berlyn Corp.,

914 F.2d 1473, 1475-76, 16 USPQ2d 1093, 1094 (Fed. Cir. 1990);

State Indus., 883 F.2d at 1580, 12 USPQ2d at 1031; Ryco, Inc. v.

Ag-Bag Corp., 857 F.2d 1418, 1422, 8 USPQ2d 1323, 1326 (Fed.

Cir. 1988); Hartness Int'l. Inc. v. Simplimatic Eng’g Co., 819 F.2d

1100, 1106, 2 USPQ2d 1826, 1829 (Fed. Cir. 1987); Otari, 767

F.2d at 853, 226 USPQ at 402; Gyromat Corp. v. Champion Spark

Plug Co., 735 F.2d 549, 554, 222 USPQ 4, 8 (Fed. Cir. 1984);

Lam, Inc., 718 F.2d 1056, 219 USPQ 670. Indeed, we have

specifically endorsed the requirement of commercial use by the

patentee of the invention in suit for an award of lost profits. In

Trell v. Marlee Electronics Corp., 912 F.2d 1443, 1445, 16

USPQ2d 1059, 1061 (Fed. Cir. 1990), this court stated,

“Tb ]ecause Trell did not sell its invention in the United States, he

could not seek damages on the basis of lost profits.”” To the same

effect is the statement in Lindemann Maschinenfabrik GmbH v.

American Hoist & Derrick Co., 895 F.2d 1403, 1406 n.2, 13

USPQ2d 1871, 1874 n.2 (Fed. Cir. 1990) (emphasis added):

Because Lindemann did not compete in the sale of its

invention in the United States, it did not, as it could not, seek

damages on the basis of lost profits.

Similarly, the need for the patentee to compete with a product

using the patented invention to obtain lost profits underlies the

statement in Micro Motion, Inc. v. Kane Steel Co., 894 F.2d 1318,

1322, 13 USPQ2d 1696, 1698 (Fed. Cir. 1990), “[w]here the

patentee produces or sells a product (or service) covered by the

patent claims, the patentee may seek to recover damages based on

a theory of lost profits .. .”; and in Del Mar Avionics, 836 F.2d at

1326, 5 USPQ2d at 1260, “[t]he general rule of determining the

actual damages to a patentee that is itself producing the patented

item is to determine the sales and profits lost to the patentee

because of the infringement” (emphasis added).

- 58a -

Moreover, under our precedent, lost profit awards have been

dependent, inter alia, on proof that consumer demand for the

patentee’s goods is created by the advantages of the patented

invention. Slimfold Mfg. Co. v. Kinkead Indus., Inc., 932 F.2d

1453, 1458, 18 USPQ2d 1842, 1845 (Fed. Cir. 1991) (“[Paten-

tee] failed to show that buyers of bi-fold metal doors specifically

want a door having the advantages of the Ford patent”). See also

State Indus., 883 F.2d at 1576-80, 12 USPQ2d at 1028-31

(consumer demand went to patented method); Ryco, 857 F.2d at

1427-28, 8 USPQ2d at 1330-31 (patentee owner can meet demand

for products covered by patent); Gyromat, 735 F.2d at 552, 222

USPQ at 6 (same).

The patentee’s willingness and ability to supply the patented

invention during the period of infringement is the thread that runs

through all precedent of this court respecting “lost profits” awards.

See Kori Corp. v. Wilco Marsh Buggies & Draglines, Inc., 761 F.2d

649, 653, 225 USPQ 985, 987 (Fed. Cir.), cert. denied, 474 U.S.

902 (1985) (Patentee “is entitled to be compensated [for its lost

profits] on the basis of its ability to exploit the patent”) (emphasis

added). While the majority does not specifically overturn any of

our precedent, the basic premises expressed therein are

eviscerated.!’

G. “Foreseeability” is not the Test for Patent Damages

The majority agrees that the types of compensable injury for

patent infringement are not unlimited. The majority draws the line

' If the majority would limit the entire market value rule precedent to “con-

voyed” sales, slip op. at 17, note 7, this is clearly unwarranted. See, e.g., Kori,

761 F.2d at 655-56, 225 USPQ at 989 (profits on entire device awarded because

patented feature created demand for patentee’s entire device). The entire

market value rule originated and continues to apply to a damage claim for lost

profits on a patentee’s device incorporating a patented improvement. Indeed, it

may be noted that the Supreme Court has never approved extension of this rule

to convoyed sales.

- 59a -

against recovery for an inventor’s heart attack or for the decrease in

the value of stock of a corporate patentee. Its opinion holds:

We believe that under § 284 of the patent statute, the balance

between full compensation, which is the meaning that the

Supreme Court [in General Motors] has attributed to the

statute, and the reasonable limits of liability encompassed by

general principles of law can best be viewed in terms of

reasonable, objective foreseeability.

If a particular injury was or should have been reasonably

foreseeable by an infringing competitor in the relevant mar-

ket, broadly defined, that injury is generally compensable. . . .

Being responsible for lost sales of a competitive product is

surely foreseeable; such losses constitute the full compensa-

tion set forth by Congress, as interpreted by the Supreme

Court, while staying well within the traditional meaning of

proximate cause.

Slip op. at 13 (emphasis added).

In the majority’s view, the consideration of patent rights ends

upon a finding of infringement. The separate question of damages

under its test does not depend on patent rights but only on

foreseeable competitive injury.'® This position cannot be squared

with the premise that compensation is due only for injury to patent

rights. Thus, the majority’s foreseeability standard contains a false

premise, namely, that the “relevant market” can be “broadly

defined” to include all competitive truck restraints made by the

patentee. The relevant market for determining damages is confined

to the market for the invention in which the patentee holds

exclusive property rights. Livesay Window, 251 F.2d at 474 (cited

with approval in Devex) (‘““The market under scrutiny then is

confined to those products only which are patented or infringed.”’).

'® The majority cites no Supreme Court or other precedent for its proposition that

“foreseeability” alone is the key to legal causation of patent damages and there

is none.

- 60a -

To paraphrase Brunswick Corp., 429 U.S. at 489, “| Plaintiffs ]

must prove more than injury causally linked to any illegal presence

in the market [i.e., the infringing goods]. Plaintiffs must prove

[patent infringement] injury, which is to say injury of the type the

[patent] laws were intended to prevent.” The injury, thus, must be

to the protected market in goods made in accordance with the

patent, not unprotected truck restraints. In sum, patent rights

determine not only infringement but also damages.

The majority does not give a passing nod to long-standing

precedent restricting a patentee’s legal injury to diversion of sales it

would have made of products containing the patented invention,

much less does it explain why the precedent should be abandoned.

It simply declares ipse dixit: “Whether a patentee sells its patented

invention is not crucial in determining lost profits damages.” Slip

op. at 16. While proximate cause limitations are acknowledged, the

majority sees no problem here because the infringing devices were

designed to compete with the ADL-100 devices and the “clear

purpose of the patent law [is] to redress competitive damages

resulting from infringement of the patent.” Slip op. at 24. This

reasoning awards patent infringement damages as if for a kind of

unfair competition with the patentee’s business. However, in-

fringement of a patent is not a species of common law unfair

competition; it is a distinct and independent federal statutory

claim. Mars Inc. v. Kabushiki-Kaisha Nippon Conlux, 24 F.3d

1368, 1373 (Fed. Cir. 1994). Moreover, the clear purpose of the

patent system is to stimulate a patentee to put new products into

the marketplace during the patent term, not to compensate the

patentee “fully” while the public benefit from the invention is

delayed until the invention falls into the public domain. Compen-

sation in the form of lost profits for injury to the exclusive market in

patented goods has provided the incentive to achieve that

objective.

Reiterating that objective, the Supreme Court stated in

Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 480 (1974):

-6la-

The productive effort thereby fostered [by the patent laws]

will have a positive effect on society through the introduction

of new products and processes of manufacturer into the

economy, and the emanations by way of increased employ-

ment and better lives for our citizens.

Ignoring this objective, this decision expands the property rights

afforded by a patent by broadening a patentee’s protected market

and, as a consequence, provides a disincentive to a patentee’s

commerce in the patented products.

Nothing in the statute supports the majority’s “foreseeability”

rule as the sole basis for patent damages. To the contrary, no-fault

liability is imposed on “innocent” infringers, those who have no

knowledge of the existence of a patent until suit is filed. Damages

are recoverable for up to six years of unknowing infringement

before suit. 35 U.S.C. § 286 (1988). “Foreseeability” is a wholly

anomalous concept to interject as the basis for determining legal

injury for patent infringement. While unknowing infringers cannot

“foresee” any injury to the patentee, they are subject to liability for

damages, including lost profits, for competition with the patentee’s

patented goods. Now they will be liable for diverting sales of the

patentee’s unprotected competitive products as well.

The “foreseeability” standard also cannot be reconciled with the

statutory requirement for a patentee to mark its patented goods

with the patent number to prevent innocent infringement.'? The

patent by itself does not give notice that the patentee’s goods are

'9 35 U.S.C. § 287(a):

Patentees, and persons making or selling any patented article for or under them,

may give notice to the public that the same is patented, either by fixing thereon

the word “patent” or the abbreviation “pat.”, together with the number of the

patent, or when, from the character of the article, this can not be done, by fixing

to it, or to the package wherein one or more of them is contained, a label

containing a like notice. In the event of failure so to mark, no damages shall be

recovered by the patentee in any action for infringement, except on proof that

the infringer was notified of the infringement and continued to infringe

thereafter, in which event damages may be recovered only for infringement

- 62a -

protected. Wine Ry. Appliance v. Enterprise Ry. Equip., 297 U.S.

387, 393 (1936). Failure to provide such notice cuts off a

patentee’s recovery of damages until actual notice of infringement

is given even from deliberate infringers who clearly can “foresee”

legal injury. As stated in Bonito Boats, Inc. v. Thunder Craft Boats,

Inc., 489 U.S. 141, 162 (1989) (alterations in original ):

The availability of damages in an infringement action is made

contingent upon affixing a notice of patent to the protected

article. 35 U.S.C. § 287. The notice requirement is designed

“for the information of the public,” Wine Railway Appliance

Co. v. Enterprise Railway Equipment Co., 297 U.S. 387, 397

(1936), and provides a ready means of discerning the status of

the intellectual property embodied in an article of manufac-

ture or design. The public may rely upon the lack of notice in

exploiting shapes and designs accessible to all. See Devices for

Medicine, Inc. v. Boehl, 822 F.2d 1062, 1066 (CA Fed. 1987)

(“Having sold the product unmarked, [the patentee] could

hardly maintain entitlement to damages for its use by a

purchaser uninformed that such use would violate [the]

patent”).

Rite-Hite could not mark its ADL-100 restraints with notice of the

847 patent. Such “notice” would constitute false marking under

35 U.S.C. § 292 (1988). To hold that a patentee may recover

damages respecting injury to its business in products that do not

embody the invention which are unmarked or marked with a

different patent number would treat a patentee that does not

practice its invention more favorably than a patentee that does.

The marking statute generates absurd results when applied to

damages tied to products not made under the patent in suit.

The majority simply has the rule backwards. Heretofore, the first

requirement to establish a patentee’s entitlement to actual dam-

occuring after such notice. Filing of an action for infringement shall constitute

such notice.

- 63a -

ages in the form of lost profits has been proof that the patentee

exercised its market place monopoly for its patented invention.

Evidence of a patentee’s business losses not due to an infringer’s

interference with the patentee’s marketing of the invention was

immaterial in assessing damages. The patent affords no property

rights which can be injured outside the market in goods protected

by the asserted patent.

The majority goes on to find the award of damages for lost sales

of ADL-100s a foreseeable injury for infringement of the °847

patent. This is a remarkable finding. The facts are that Rite-Hite

began marketing its ADL-100 motorized restraint in 1980. Kelley

put out its Truk Stop restraint in June 1982. There is no dispute in

this case” that Kelley “designed around” the protection afforded

by any patent related to the ADL-100 with which Kelley’s Truk

Stop restraint was intended to compete. Two years later, the 847

patent in suit issued on the later-developed alternative hook

technology used in the MDL-55. Kelley would have to have had

prescient vision to foresee that it would be held an infringer of the

unknown claims of the subsequently issued ’847 patent and that its

lawful competition with the ADL-100 would be transformed into a

compensable injury.

Kelley would also have had to foresee that, for the first time in

over 200 years of patent infringement suits, a court would extend

protection to a part of a patentee’s business which is not dependent

on the patentee’s use of the patented technology. Moreover, the

Supreme Court and all sister circuits which have spoken on the

legal scope of damages have, without exception, rejected the

majority’s expansive view that the only limitations on patent

infringement damages are (1) satisfaction of a “but-for’” test

applied to “foreseeable” injuries, and (2) the amount must not be

too low.

* Rite-Hite, however, is not foreclosed by this litigation from suing Kelley on the

ADL-100 patents and asserting collateral estoppel respecting the attribution of

its ADL-100 losses to Kelley.

- 64a -

Under the entire market value rule, if Rite-Hite used the later

improvement of the ’847 patent in the ADL-100 restraint, it would

have been required to prove that demand for those restraints was

created by that invention to receive lost profits on the entire device.

The majority recognizes the entire market value rule, citing State

Indus., 883 F.2d at 1580, 12 USPQ2d at 1031 (recovery of

damages based on the value of the entire apparatus containing

several features allowed where patented feature is basis for

customer demand), but sees no inconsistency in not applying it

here. This reasoning is difficult to follow. The majority agrees that

if a patented improvement is used in a device of the patentee with

which the infringer competes, to recover lost profits on the entire

device, the patentee must prove that the patented feature is the

basis for consumer demand for the entire product; but if the

patentee substitutes other unprotected technology for the patented

improvement, then the patentee is entitled to all of its lost profits.

Surely this negates the stimulus for a patentee to put out products

with the improvement.

The basic flaw in the majority’s ruling is its rejection of the

premise that recovery must be tied to profits from the invention

itself. Here the patentee would have made no profits from the

patented invention by additional sales of the unprotected

ADL-100. There is no reason for the entire market value analysis if

a patentee is entitled to compensation for “competitive damages”

to its business generally. The ’847 patent discloses and claims

particular hook technology for a truck restraint. No part of the

invention relates to motors. Indeed, the specification states that an

advantage of the invention is that it requires no motor. No doubt

the motorized features of the ADL-100 and the Truk-Stop which

added to their price, by the same token, contributed to their

profitability and salability as well. But because Rite-Hite did not

use the ’847 invention in the ADL-100 restraint, it escaped having

to prove consumer demand for the motorized restraint was attribu-

table to the ’847 invention of an improved hook. It simply was

- 65a -

awarded lost profits based on unpatented features and features

protected by other patents. None of the lost profits on the ADL-

100s are the fruit of the ’847 invention. It cannot be the law that

they are recoverable.

If damages are awardable based on lost sales of a patentee’s

business in established products not protected by the patent in suit,

the patentee not only has an easier case as a matter of proof, but

also would receive greater benefits in the form of lost profits on its

established products than if the patentee had made the investment

necessary to launch a new product. That lost profits on an

established line are likely to be greater than on a new device cannot

be gainsaid. See Continental Paper Bag, 210 U.S. at 429. This

result is not in accordance with the purpose of the patent statute.

Actual damages are meant to compensate a patentee for losing the

reward of the marketplace which the patentee’s use of the

invention would otherwise reap. Without such loss, Congress has

mandated compensation in the form of a reasonable royalty.

The old rule stimulated a patentee’s commerce in patented

goods. The new rule makes it more profitable to the patentee to

protect the status quo. The status quo is not “progress in the arts.”

Article I, sec. 8. I conclude the majority’s rule is a wrong

interpretation of the statute, indeed, may exceed the constitutional

power to provide inventors with the exclusive right to their

discoveries.

H. The ADL-100 Patents

Not only is the majority’s basic idea of legal injury unsound

based on “foreseeability” but also its specific test is equally flawed.

For convenience, I have referred to the ADL-100 as “unpro-

tected,” meaning not covered by the patent in suit. However, a key

factor in the majority’s decision awarding damages for lost sales of

the ADL-100 is that the “device” is “patented”. The majority does

not, nor did the parties, discuss what inventions the one or more

patents on the ADL-100 cover. Nevertheless, the majority declares

- 66a -

the ADL-100 provides the only alternative technology. While it is

inappropriate for an appellate court to make findings, the finding by

the majority is erroneous if one examines the record independently.

There are other mechanisms for securing trucks to loading docks.

Indeed, the Patent Office considered Kelley’s Truk-Stop suffi-

ciently different from the prior 847 patent to grant Kelley its own

patent. Unfortunately for Kelley, this court earlier upheld the

finding that its different structure was sufficient similar to the ’847

patent to constitute infringement. 819 F.2d 1120, 2 USPQ2d 1915

(Fed. Cir. 1987). But there were other alternatives which could be

substituted. In any event, the one or more patents on technology

used in the ADL-100 were never asserted against Kelley, and the

validity of those patents is untested. If those patents are invalid, the

majority’s analysis collapses. As stated in Lear, Inc. v. Adkins, 395

U.S. 653, 668 (1969):

[Federal law requires that all ideas in general circulation be

dedicated to the common good unless they are protected by a

valid patent. [Emphasis added. ]

Given that Kelley has had no legal basis for bringing a declaratory

judgment action challenging the unlitigated patents (never having

been charged with their infringement), the majority imposes

liability and overlooks the unfairness in its theory. If the unlitigated

patents are significant to damages, Kelley deserves an opportunity

to defend against them. A clearer denial of due process is rarely

seen. The award of damages for competition with Rite-Hite’s

market for ADL-100s is no more supportable than an injunction

against infringement of the ADL-100 patents.

If nothing else, the patent term limit provision of 35 U.S.C.

§ 154 is skewed by protecting the profits on goods made under one

patent for infringement of another. Under the majority’s decision,

the 17-year terms of the ADL-100 patents are meaningless. Rite-

Hite is entitled to the add-on years provided by the later 847

patent after the terms of the ADL-100 patents expire. Congress

has provided the term and the basis for protection of ADL-100

- 67a -

restraints. An award of damages on ADL-100s based on infringe-

ment of the ’847 patent expands the term of protection as well as

the basis for protection. Moreover, the majority would award

damages for losses connected to the ADL-100 even if the patents

on that device are invalid (albeit under a slight variation of a “but-

for” test). If Rite-Hite had asserted infringement of the ADL-100

patents, it would receive no lost profits based on invalid ADL-100

patents but, nevertheless, is held entitled to lost profits on

ADL-100s based on the ’847 patent. This construction of the

statute seems patently absurd.

In short, Rite-Hite has obtained indirectly what it may or may

not be entitled to recover directly by suit on the ADL-100 patents.

Moreover, this was accomplished without putting the ADL-100

patents at risk to a challenge of invalidity. The unasserted patents

provide no basis for sweeping the losses related to the ADL-100

into the scope of legal injury attributed to Kelley’s use of the 847

invention.

The majority rejects what it called Kelley’s “antitrust” argu-

ments that the award of lost profits on the ADL-100 unduly

expanded rights in the ’847 patent on the rationale that this case

deals only with what injuries are compensable for infringement, not

with violation of antitrust laws. This rationale cannot be squared

with Ethyl Gasoline v. United States, in which the Supreme Court

held:

The patent monopoly of one invention may no more be

enlarged for the exploitation of a monopoly of another, than

for the exploitation of an unpatented article, or for the

exploitation or promotion of a business not embraced within

the patent.

309 U.S. 436, 459 (1940) (citations omitted). See Motion Picture

Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 511-13

(1917).

- 68a -

No one argues that Rite-Hite is violating the antitrust laws.

However, an award of damages for infringement of one patent

based on losses of sales of a product not within the protected

market violates antitrust policies. Under those policies, Rite-Hite

is not entitled to tribute for infringement of one patent for losses in

connection with a competitive product protected, if at all, only by

other patents. This court has no license to elevate patent rights in

the guise of damages over antitrust policies which preclude

enlargement of the exclusive market provided by the 847 patent to

promote and exploit the business of a patentee in goods not

embraced within the patent.

I. Reasonable Royalty is a Proper Measure of “Adequate”

Damages

Finally, Rite-Hite argues that the highest possible damages

should be imposed to deter infringers and that the district court,

therefore, correctly assessed a higher lost profits award in lieu of a

reasonable royalty. Rite-Hite also argues that a reasonable royalty

creates a compulsory license. Both points are meritless. As

indicated, a finding of infringement is not dependent on a finding of

negligence or culpable intent by the wrongdoer. An infringement,

like a trespass, may be committed unknowingly. In such situations,

the amount of damages manifestly can have no effect to deter an

unknowing infringer. Basic damages, which are at issue here, fall

on the innocent and the culpable to the same extent. See Intel v.

United States Int'l Trade Comm n, 946 F.2d 821, 832, 20 USPQ2d

1161, 1171 (Fed. Cir. 1991); Thurber Corp. v. Fairchild Motor

Corp., 269 F.2d 841, 845, 122 USPQ 305, 308 (Sth Cir. 1959); see

also Kansas City S. Ry. Co. v. Silica Prods. Co., 48 F.2d 503, 508, 8

USPQ 476, 481 (8th Cir.), cert. denied, 284 U.S. 626 (1931);

Thompson v. N.T. Bushnell Co., 96 F. 238, 243 (2d Cir. 1899). Cf.

Seymour v. McCormick, 57 U.S. (16 How.) at 488. The provision

for trebling damages is the deterrent against deliberate

infringement.

- 69a -

The spectre of a compulsory patent license is raised. However, a

damages award calculated as a reasonable royalty gives no

mandatory license. If it did, relief by way of an injunction against

future use makes no sense.”! A reasonable royalty is simply a

measure of damages, not a license. Dowagiac, 235 U.S. at 649;

Fromson v. Western Litho Plate & Supply Co., 853 F.2d 1568,

1574-76 (Fed. Cir. 1988). The remedy Congress itself selected

cannot be condemned on the ground it conflicts with Congress’

views reflecting compulsory licenses. Obviously, it does not.” A

reasonable royalty is in fact a Congressional largesse for cases

where a patentee might otherwise receive only nominal damages.

A patentee is now statutorily entitled to a reasonable royalty even

though it has not suffered or cannot prove a financial loss to its

market in patented goods.

J. Conclusion

The majority holds that it has balanced the interests of the

patentee and the infringer. I disagree. In Fogerty v. Fantasy, Inc.,

114S. Ct. 1023, 1030 (1994) the Supreme Court stated:

Because copyright law ultimately serves the purpose of

enriching the general public through access to creative works,

it is peculiarly important that the boundaries of copyright law

be demarcated as clearly as possible. To that end, defendants

who seek to advance a variety of meritorious copyright

defenses should be encouraged to litigate them to the same

*! The analysis is confused with the situation where the patentee is a licensing

patentee who offers paid-up licenses to all who desire them. See 3 Robinson

§ 1058 at 331 and cases cited therein.

” Indeed, Congressman Lanham embraced the reasonable royalty provision as

the preferred remedy on the facts of this case, stating:

Of course, in a case of an innocent infringement, it is to be presumed that the

court would assess no more than a reasonable royalty for such time as the

patent was infringed by the innocent user.

92 Cong. Rec. 1857 (1946). See also House Hearings at 19-21.

- 70a -

ae eit ol ake tdi oh ee

extent that plaintiffs are encouraged to litigate meritorious

claims of infringement.... Thus a successful defense of a

copyright infringement action may further the policies of the

Copyright Act every bit as much as a successful prosecution

of an infringement claim by the holder of a copyright.

The same policy statement applies equally to patent law enacted

under the complementary provision of Article I, section 8 of the

Constitution. Challengers who have meritorious defenses to a

charge of patent infringement should be encouraged to litigate

them without fear of ruinous damage awards. Kelley mounted a

substantial and legitimate challenge to the validity and its infringe-

ment of the 847 patent in suit. Kelley was held to be wrong on both

points, but its infringement was not willful. The district court

stated that “the Kelley people [acted] in the spirit of good

competition” and “certainly did not intend to infringe.” 629 F.

Supp. 1042, 1045, 231 USPQ 160, 161. The consequence of

expansion of legal injury in this case is that the patentee’s major

competitor, an innocent infringer, has been forced into bankruptcy

by the lost profits award on unprotected goods. This result does not

further the policies of the patent statute. Patentees are a favored

class but this decision goes too far in the scope of protection. It is

not the remedy Congress understood and intended to provide.

Commercialization of inventions in the fast changing world of

today is at least as viable a purpose of the patent statute as under

the prior statutes. For our patent system to fully serve its goal of

promoting economic growth, innovations must make it to market

during the patent term. The period of exclusivity, a monopoly in

the market place, is granted to that end.

The Senate Report on the legislation that culminated in this

court’s creation cites the following testimony of Harry F. Man-

beck, Jr., then General Patent Counsel for the General Electric

Company and later Commissioner of Patents and Trademarks:

-7la-

Patents, in my judgment, are a stimulus to the innovative

process, which includes not only investment in research and

development but also a far greater investment in facilities for

producing and distributing goods. Certainly, it is important to

those who must make these investment decisions that we

decrease unnecessary uncertainties in the patent system

The Federal Courts Improvement Act of 1981, S. Rep. No. 97-

275, 97th Cong., Ist Sess., 6 (1981).

The Senate Report on the 1980 Reexamination statute cites the

following testimony of then Commissioner of Patents and Trade-

marks Sidney Diamond:

Indeed, the patent system was established to provide certain

incentives for the conduct of activities critical to our economic

and technological prosperity — the invention of new and

improved technology, the disclosure of this technology to the

public, and the investment in its commercialization.

Patent Reexamination, S. Rep. No. 96-617, 96th Cong., 2d Sess., 9

(1980). These are but two examples emphasizing the present day

importance of patents as an incentive for investment in marketing

the products for which the exclusive market is given. An exhaus-

tive treatment would occupy a sizeable tome.

It cannot be disputed that Congress intended that the patent

grant provide an incentive to make investments in patented

products during the patent term. If a patentee is rewarded with lost

profits on its established products, the incentive is dulled if not

destroyed. Why make the investment to produce and market a new

drug if the patent on the new discovery not only protects the status

quo in the market but also provides lost profits for the old?

For the foregoing reasons, I would hold that an injury to the

patentee’s marketing of products protected only by other pat-

ents — if at all — does not fall within the grant of rights protected

by the ’847 patent in suit and is not compensable. Thus, I would

- 72a-

vacate the award of lost profits on 3,283 sales based on Rite-Hite’s

loss of business in ADL-100 restraints and remand for damages to

be assessed on the basis of a reasonable royalty for those

infringements.

Il.

LEVELER SALES

I agree with the majority that under the entire market value rule,

Rite-Hite is not entitled to lost profits on dock levelers, sold in

conjunction with patented or unpatented restraints. However, I

disagree with the majority’s reasoning. The entire market value

rule is based on a realistic evaluation of the commercial magnetism

of the patented invention, not on whether components in a

machine — or auxiliary goods — function together. I will not

lengthen this already lengthy opinion but merely note that the

majority proffers strained interpretations of the cited precedent. I

would deny the award because the sales of levelers were not

attributable to consumer demand for the invention of the ’847

patent.

IV.

CALCULATION OF A REASONABLE ROYALTY

The district court awarded damages in the form of a reasonable

royalty for 502 infringing sales based on lost profits on Rite-Hite’s

restraints and restraint leveler packages. This “reasonable royalty,”

which totals $1,045.00 per infringing restraint, is more than the

price of Rite-Hite’s patented MDL-55, more than 75 percent of

the average net sale price of Kelley’s Truk-Stop, and 33 times

greater than Kelley’s net profit on its entire machine. If lost profits

on ADL-100’s were not recoverable as such, the court said it would

have raised the amount of the reasonable royalty to include all of

Rite-Hite’s anticipated profits on ADL-100 units and packages.

Rite-Hite, 774 F. Supp. at 1540 n.22, 21 USPQ2d at 1821 n.22.

- 73a -

In determining a reasonable royalty, the district court started

with basically wrong ideas even if ADL-100s and levelers were

protected by the °847 patent. The court erroneously believed

Kelley had to pay a reasonable royalty on ADL-100 sales if lost

profits were not awarded. Jd. This is a fundamental misunderstand-

ing. Rite-Hite is entitled to a reasonable royalty on Kelley’s sales of

infringing deviczs. Rite-Hite would be entitled to a reasonable

royalty on those sales even if it made no sales of a competing

product. Further, where a patentee is not entitled to lost profit

damages, lost profits may not, in effect, be awarded by merely

labelling the basis of the award a reasonable royalty. See

SmithKline Diagnostics, Inc. v. Helena Labs. Corp., 926 F.2d 1161,

1165, 1168, 17 USPQ2d 1922, 1925, 1928 (Fed. Cir. 1991)

(rejecting SKD’s proposed use of its lost profits figure as a

“reasonable royalty”).

A “reasonable royalty” is a hypothetical royalty for the use of the

patented technology by the infringer, calculated as if the parties

negotiated at arm’s length as a willing licensor and a willing

licensee on the date when the infringement began. State Indus.,

883 F.2d at 1580, 12 USPQ2d at 1031; Hanson .v. Alpine Valley

Ski Area, Inc., 718 F.2d 1075, 1079, 219 USPQ 679, 682 (Fed. Cir.

1983). While frequently spoken of as willing negotiations, Beatrice

Foods Co. v. New England Printing & Lithographing Co., 923 F.2d

1576, 1580, 17 USPQ2d 1553, 1556 (Fed. Cir. 1991); 5 Donald S.

Chisum, Patents, § 20.03[4][b] (1992), the result has more of the

character of a forced settlement where neither party gets all it

would wish.

The focus of a reasonable royalty determination is on the value

of the invention in the marketplace. As the statute states, a

reasonable royalty is an award “for the use of the invention by the

infringer.” 35 U.S.C. § 284. Rite-Hite’s lost profits on ADL-100s

and levelers are not factors in calculating that value for the same

reasons lost profits are not awardable for the goods. Neither is part

of the exclusive market granted by the ’847 patent. The ’847 patent

- 74a -

may not be used “for the exploitation or promotion of a business

not embraced within the patent.” Ethy/ Gasoline, 309 U.S. at 459.

A royalty based on unprotected goods unlawfully exploits the

patent. I would, therefore, remand with instructions to disregarded

injury to this part of Rite-Hite’s business in determining a

reasonable royalty.

A reasonable royalty requires a balancing of the interests of the

parties. It would be proper, therefore, to consider Rite-Hite’s

policy of not licensing direct competitors like Kelley, but this factor

cannot justify the rate here. See Panduit, 575 F.2d at 1164, 197

USPQ at 736. In particular, Rite-Hite’s claim that Kelley needed a

license of the ’847 technology to make any restraint is clearly

fallacious. The ADL-100 itself did not use that technology and

there were numerous non-infringing mechanical alternatives. That

they were not yet commercialized is irrelevant respecting a royalty.

Kelley would likely have turned to the other technology to design

around the ’847 invention if the royalty were too high.

It is apparent that the district court limited its assessment to

Rite-Hite’s side of the hypothetical negotiating table rather than to

balance the interests of both parties. Kelley presented extensive

evidence of royalty rates prevalent in the industry, which is relevant

to determining a reasonable royalty. Georgia-Pacific Corp. v.

United States Plywood Corp., 318 F. Supp. at 1120, 166 USPQ at

238 (factor 2: “The rates paid by the licensee for the use of other

patents comparable to the patent in suit.”). This evidence included

a 0.9 percent royalty paid by Rite-Hite to Kelley to settle a suit for

infringement of Kelley’s leveler patents. Although licenses ex-

tracted under the penumbra of threatened litigation as to the

validity and/or infringement are, as the district court stated, “not

an accurate gauge of a reasonable royalty,” Rite Hite, 774 F. Supp.

at 1535, 21 USPQ2d at 1817, this rule does not apply where, as

here, validity and infringement appear to have been settled in the

licensor’s favor when the license was entered. See Snellman v.

Ricoh Co., 862 F.2d 283, 289, 8 USPQ2d 1996, 2001 (Fed. Cir.

- 75a -

1988), cert. denied, 491 U.S. 910 (1989). The district court also

dismissed other testimony favorable to Kelley as being “of limited

relevance, because it is based upon royalties contained in settle-

ment agreements.” Yet two of these licenses (Abon/MHW and

Metz/Serco) were not the product of litigation. Rite-Hite’s

current CEO (Mike White) took a license under the ’847 patent

when he bought Rite-Hite from his father. Although the district

court found this intra-family deal “too dissimilar” from a true

hypothetical negotiation, White himself testified that the transac-

tion was arms length and that he paid a fair price for the license.

The evidence of record negates a finding that the dock equip-

ment industry is so lucrative that net profits in the 50-75 percent

range could be anticipated. Rite-Hite’s net profits during the

period of infringement were in the 6-10 percent range and Kelley’s

only 2.3 percent. This evidence of actual profitability forcefully

negates the anticipation by either party of profits of 50-75 percent

on their devices and was improperly disregarded in the district

court’s determination of what royalty Kelley would have agreed to

pay. Lindemann Maschinenfabrik, 895 F.2d at 1408, 13 USPQ2d

at 1875 (characterizing as “absurd” expert testimony that infringer

“would agree to pay a royalty in excess of what it expected to make

in profit”); Hughes Tool Co. v. Dresser, 816 F.2d 1549, 1558, 2

USPQ2d 1396, 1403-04 (Fed. Cir. 1987); Trans-World Mfg.

Corp. v. Al Nyman & Sons, Inc., 750 F.2d 1552, 1568, 224 USPQ

259, 269 (Fed. Cir. 1984). Although this court has sanctioned

royalty awards that exceeded the infringer’s actual net profits, we

have done so only when there was evidence that the infringer

actually anticipated greater net profits. Snellman, 862 F.2d 283, 8

USPQ2d 1996; TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 229

USPQ 525 (Fed. Cir.), cert. denied, 479 U.S. 852 (1986). Kelley

is not guaranteed a profit, of course, but anticipated profit is a

factor in hypothetical negotiations. Hanson, 718 F.2d at 1081, 219

USPQ at 684 (“a reasonable royalty would leave an infringer with

reasonable profit”); Panduit, 575 F.2d at 1164, 197 USPQ at 736

- 76a -

(court should determine “the customary profit allowed licensees in

the electrical duct industry’); see also Trans-World Mfg. Corp.,

750 F.2d at 1568, 224 USPQ at 269. A royalty which on any

reasonable projections respecting the innocent infringer’s business

would be confiscatory violates that balance. It is simply beyond

reality to infer that the management for the five hundred em-

ployee-owners of Kelley would have negotiated a royalty which, it

was evident at the time, would destroy their business and jobs.”

Although the determination of a fair and reasonable royalty is a

difficult judicial chore, seeming often to involve more the talents of

a conjurer than those of a judge, Fromson, 853 F.2d at 1574, 7

USPQ2d at 1612, the finding in this case of a reasonable royalty in

the amount of $1,045 per unit on a $1,345.79 item of which the

patented 847 technology was merely a replaceable feature should

be vacated because of legal error in the factors and evidence

considered.

Vv. CONCLUSION

This court was created to bring uniformity to the law; but where

uniform precedent exists, it was given no mandate to ignore

established law. It was not given a blank legal slate on which to

write greatly enlarged property rights for patentees. In view of this

court’s exclusive jurisdiction, however, the majority has effectively

set new precedent for all awards of damages in future patent

cases.”*

* Here, the amount of damages for nonwillful infringement awarded or proposed

to be awarded as a royalty is so great that it has forced Kelley to file for

bankruptcy. Kelley, an employee-owned business, would now likely be out of

business had we not granted its motion for stay of execution of the district

court's judgment. This case therefore illustrates the mischief and misery that

can accompany the over enforcement of patents rights.

** Another case awarding damages on the patentee’s unpatented goods is already

waiting in the wings.

-77a-

The majority justifies its expansion of patent protection with the

explanation that the Supreme Court has provided no definitive

ruling on the proper scope of damages. I conclude th

This text is long and has been trimmed here. Open the source document for the complete record.