American Hoist & Derrick Company, Cross-Appellee v. Sowa & Sons, Inc., Cross-Appellant

Citations: 725 F.2d 1350; 220 U.S.P.Q. (BNA) 763; 1984 U.S. App. LEXIS 14830Docket: 19-1201

Court: Court of Appeals for the Federal Circuit; January 11, 1984; Federal Appellate Court

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American Hoist and Derrick Co. (AmHoist) appealed a decision from the U.S. District Court for the District of Oregon, which ruled in favor of Sowa Sons, Inc. (Sowa) regarding AmHoist's claims of patent infringement on Shahan U.S. Patent No. 4,079,584 for a "Heavy Duty Shackle." A jury found all claims invalid due to obviousness and fraud during patent prosecution. The district court accepted the jury's obviousness determination and cited sufficient evidence for the fraud findings, indicating it was serious enough to render the case exceptional under 35 U.S.C. § 285, justifying a $50,000 attorney fee award to Sowa. However, Sowa's cross-appeal for unfair competition and antitrust counterclaims was dismissed due to AmHoist's successful summary judgment motion.

The Federal Circuit vacated the jury's findings due to incorrect jury instructions and disputed factual issues, ordering a new trial. It reversed the trial court's conclusion that no damages were proven and partially affirmed and reversed the dismissal of Sowa’s antitrust and unfair competition counterclaims. The patent's abstract describes the shackle's construction, which includes a cylindrical bar formed into a flattened U shape, with specific features detailed in accompanying figures.

Claims 3, 5, and 7 describe a heavy-duty shackle bow designed for large loads, featuring rein sections with specific dimensions, a broadened U-shaped central cylindrical portion, and parallel ears with central openings for a pin. Claim 3 specifies the structural details, including the shape and spacing of the parts, while claim 5 outlines the shackle's circular eye, U-shaped cross-section, consistent thickness, and heat treatment. Claim 7 adds the inclusion of a locked pin through the central openings.

In the legal context, Sowa denied infringement of these claims and counterclaimed for a declaratory judgment of invalidity, citing newly discovered prior art, which led AmHoist to seek a reissue of its patent. Subsequently, Sowa amended its claims to include damages for unfair competition and federal antitrust violations, alleging AmHoist committed fraud by not disclosing relevant prior art to the Patent and Trademark Office (PTO). During pretrial proceedings, Sowa acknowledged its products infringed the claims, and its counterclaims were separated for trial. A jury ruled all claims invalid due to obviousness under 35 U.S.C. § 103 and fraud on the PTO.

Following the jury's verdict, the PTO approved AmHoist's reissue application for claims 1, 2, 5, 6, and 7 without changes and accepted an amended claim 3. The district court determined the issue of obviousness was a legal question for the court, not the jury, and it ruled the patent invalid due to the lack of complete relevant prior art presented to the PTO, which negated the presumption of validity. The court noted that a skilled engineer would typically be capable of assessing the necessary design elements for heavy-duty shackles, leading to its final opinion on the patent's validity.

The jury found that the Shahan patent was obvious to a person of ordinary skill in the relevant field at the time of invention, primarily due to its circular cross-section design, which was not novel and had been previously seen in anchor shackles. The court deemed the case "exceptional" under 35 U.S.C. § 285, despite insufficient evidence to support defendant AmHoist's unfair competition claim. The jury also concluded that AmHoist's patent was invalid and that it had committed fraud on the Patent Office, although a reissue application had been approved. The judge agreed that AmHoist's actions were more than mere negligence, warranting an award of attorney's fees to Sowa, who successfully challenged the patent. The district court awarded $50,000 in attorney fees for work related to the patent claims, which was less than Sowa's requested amount of $90,367.55. 

On appeal, AmHoist contended that the court erred in submitting the fraud issue to the jury due to a lack of evidence of bad faith or intent to deceive, and argued that the jury's findings regarding damages and jury instructions were incorrect. Sowa countered that there was substantial evidence supporting the jury's fraud finding and that AmHoist did not demonstrate any lost profits from Sowa's sales of the accused shackles.

AmHoist contends that the court incorrectly instructed the jury that it bore the burden of proving nonobviousness. Sowa counters this assertion by arguing that AmHoist failed to object to the jury instruction, that the instruction aligned with the applicable legal standards, that any potential error was harmless due to an independent finding of fraud associated with the patent claims, and that the claims are invalid under 35 U.S.C. § 103 based on undisputed facts—though the latter point is itself disputed. AmHoist maintains that it complied with procedural rules by submitting its own instructions placing the burden of proving obviousness on Sowa, asserting that no objection was necessary if the instruction accurately reflected Ninth Circuit law.

The court, while expressing regret over the need for a new trial due to the complexities of jury involvement in patent disputes, mandates a new trial. The jury's verdict, which includes questions regarding the validity of specific patent claims and reasons for invalidity if applicable, highlights the issues with general verdict forms lacking detailed interrogatories. The court acknowledges AmHoist's claims of erroneous instructions, agreeing upon reviewing the extensive jury instructions provided prior to deliberation.

The court instructed the jury regarding the burden of proof in patent invalidity claims, stating that if the defendant's cited prior art was as pertinent as the art considered by the examiner for the Shahan patent, the defendant must prove obviousness by "clear and convincing evidence." Conversely, if the cited prior art was deemed more relevant, the presumption of validity would be lost, shifting the burden to the plaintiff to prove non-obviousness by a preponderance of the evidence. This instruction was deemed erroneous for two key reasons.

First, it misallocated the burden of proof, contrary to 35 U.S.C. Sec. 282, which asserts that the burden of establishing a patent's invalidity lies with the party claiming invalidity, a principle reinforced by precedent. The court emphasized that the burden of persuasion remains with the party challenging validity, regardless of the examiner's consideration of prior art.

Second, the jury instruction inaccurately conveyed the concept of the "presumption of validity," contributing to confusion about its implications. The presumption, established by courts prior to the 1952 Patent Act and codified in Sec. 282, asserts that patents are presumed valid and the burden of proving otherwise rests with the challenger. This statutory framework aimed to simplify and clarify the legal landscape surrounding patent validity, reinforcing the notion that the presumption is constant and not subject to fluctuation based on the relevance of prior art.

The author of the opinion, who contributed to the 1952 Patent Act, addressed the New York Patent Law Association, emphasizing that Section 282 established a presumption of validity for patents, countering judicial skepticism. In 1952, case law regarding this presumption was inconsistent, allowing judges to express varying views. The fundamental premise was that government agencies like the Patent Office are presumed to perform their duties properly, supported by precedent from *Morgan v. Daniels*. The Supreme Court's decision in *Radio Corp. v. Radio Laboratories* acknowledged the variability of the presumption's force across courts. 

Despite differing interpretations, a consistent principle emerged: a party challenging the validity of a patent bears a heavy burden of proof, requiring evidence beyond a mere preponderance. The essence of Section 282 remains that the burden lies with the attacker, and this burden does not shift throughout the legal process. When an attacker uses only prior art considered by the Patent Office (PTO), they must overcome the deference owed to the PTO's presumed expertise. If the attacker introduces new prior art or evidence not reviewed by the PTO, it does not shift the burden of proof, but it may reduce the deference owed to the PTO, potentially aiding the attacker's case without altering the standard of proof, which remains clear and convincing evidence. The attacker must demonstrate that the PTO erred in granting the patent when relying on the same evidence. In cases involving new evidence, the tribunal can assess that evidence without needing to defer to the PTO's judgment, allowing it to carry more weight in meeting the attacker's burden.

Section 282 establishes a presumption of patent validity, requiring the challenger to prove invalidity with clear evidence. The Patent and Trademark Office (PTO) decision to issue a patent warrants deference regarding evidence it considered, but not for evidence it did not evaluate. All relevant evidence on validity must be considered by the tribunal, regardless of PTO review.

In relation to 35 U.S.C. § 103, the jury must assess whether the differences between the claimed invention and prior art yield a new and unexpected result. A patent cannot merely combine old elements without producing a novel outcome, as this would unjustly restrict public access to known innovations. While evidence of a new or synergistic result can support nonobviousness, it is not a stringent requirement for patentability. Courts have rejected the notion that such results are essential, emphasizing that the focus should be on the obviousness of the invention's creation rather than solely on its outcome.

The Seventh Circuit has identified "fundamental flaws" in the argument that synergism is necessary for patentability. Additionally, it is agreed that the district court should have presented factual inquiries related to § 103 to the jury through special interrogatories, as the failure to do so makes it challenging for reviewing courts to find no abuse of discretion by the trial judge.

The excerpt addresses the use of special interrogatories in legal proceedings, emphasizing their role in aiding appellate review and potentially preventing lengthy retrials by clarifying the jury's decision-making basis. It highlights that the Fifth Circuit supports the use of such interrogatories because they delineate the functions of judge and jury, particularly in patent cases. The district court's evaluation of the Shahan patent's validity is discussed, noting that the court found the claims invalid based on the jury's findings and evidence, despite lacking explicit jury findings to guide its decision. The court performed its own fact-finding regarding prior art and the standard of skill in the art. It is noted that a district court cannot seek only legal conclusions from the jury while acting as the factfinder. 

On the fraud issue, the excerpt details the jury instructions regarding the applicant's duty to disclose relevant information to the Patent Office (PTO). The court instructed that intentional withholding of material facts constitutes fraud, whereas good faith mistakes do not. However, the instructions were criticized for being overly broad, as they suggested a duty to disclose any information that might influence the PTO's decision, which could include information that favors the applicant's claims. This raises concerns about the accuracy and fairness of the jury instructions regarding patent disclosures.

A jury should not receive instructions on "fraud in the PTO" that include terms like "fraudulently withholds any information" or "makes fraudulent representations," as these phrases do not clarify the concept of fraud and may confuse jurors. An applicant for a patent has no obligation to disclose all pertinent prior art or information but is only required to disclose material information. Materiality is not defined by mere relevance but must meet a standard of significance to the patent examiner's decision-making process. Three distinct orders of materiality have been recognized: an objective "but for" standard, a subjective "but for" standard, and a "but it may have" standard, with the latter allowing inquiry into whether withheld facts could have influenced the examiner's decision. The PTO Rule 1.56(a) provides a broad definition of materiality, indicating that information is material if a reasonable examiner would consider it important. However, materiality should not be the sole focus in fraud inquiries; the concepts of materiality and culpability are interconnected. A lesser degree of materiality may suffice to demonstrate intent to defraud, while a greater degree may indicate wrongful nondisclosure. The court should instruct the jury to first determine the pertinency of withheld information, which is a factual question, before addressing materiality and its degree.

Jury instructions must be limited to the issues based on pleadings and evidence. Since there was no testimony from the examiner who approved the application, the jury could have been instructed on the PTO Rule 1.56 materiality standards, including the "but it may have" and the objective "but for" standards. The jury is also tasked with determining the sufficiency of proof regarding intent, which can range from a complete lack of evidence to direct evidence of intent, including varying degrees of negligence or recklessness.

Unlike common law fraud, which requires a jury to affirmatively answer specific factual questions regarding misrepresentation, intent, and reliance, the determination of fraud in this context hinges on a nuanced assessment of intent relative to materiality. This assessment requires judicial discretion rather than a straightforward factual determination by the jury.

Sowa claims that AmHoist cannot challenge the jury instructions on materiality due to a lack of objection at trial. However, the complexities of "fraud in the PTO" warrant a correction of any fundamental errors in jury charges, even if unobjected to. 

Additionally, AmHoist disputes the court's refusal to instruct the jury on how reissue proceedings affect Sowa's burden of proof concerning obviousness. Sowa argues that the reissue application was still pending at the time of trial, negating the application of a presumption of validity. This issue is now moot, but if retried, the jury should be informed that the PTO has since held the claims patentable based on additional art discovered by Sowa, thus increasing Sowa's burden of proof regarding unpatentability.

The PTO's decision may influence the assessment of the materiality of prior art concerning the fraud issue. AmHoist seeks clarity on jury instructions regarding the effects of reissue, but no additional impacts on jury instructions are identified. Regarding damages, AmHoist contends that the jury's verdict of no damages contradicts the evidence. Testimony confirms that both AmHoist and Sowa bid on a contract for twelve shackles, with Sowa winning the bid. Sowa argues that the jury's zero damages finding resulted from AmHoist's inadequate evidence to show that it would have secured the sales absent the infringement, specifically noting AmHoist did not demonstrate it was the second bidder or that no acceptable non-infringing substitutes existed.

AmHoist counters that it is undisputed that International Rope requested Sowa to supply an AmHoist shackle, which Sowa did. This creates a reasonable probability that, had Sowa not infringed, International Rope would have purchased the shackle from AmHoist. The "but for" rule does not require absolute proof that customers would have chosen the patent-holder's product over others. Additionally, the jury received no clear instructions on calculating damages, with references only to "actual loss." The law stipulates that damages cannot exceed the plaintiff's actual loss due to infringement, and the jury must determine this loss based on the preponderance of the evidence for the eighteen sales made by Sowa. It is agreed that June 26, 1979, marks the date when Sowa first received notice of the infringement claim regarding the Shahan patent.

Plaintiff's damages are confined to the actual loss from eighteen sales, capped at $21,498. Although Sowa acknowledged infringement of specific claims of the Shahan patent by its manufactured shackles, the eighteen sales mentioned were not included in the stipulated facts presented to the jury. These sales were recognized by Sowa's counsel during a private discussion regarding jury instructions. 

The court rejected AmHoist's motion for judgment n.o.v. or a new trial, finding sufficient evidence of intentional fraud, which led to the scheduling of a trial for Sowa's antitrust and unfair competition claims based on this fraud. Sowa cross-appealed, arguing that the trial court incorrectly granted summary judgment to AmHoist and dismissed Sowa's counterclaims. Sowa contended that the court mistakenly required a subjective "but for" test of materiality that was unmet and claimed it had sufficient evidence for other necessary elements of a Sherman Act Section 2 violation.

AmHoist countered that Sowa's claims were flawed due to a lack of evidence on the relevant market. However, Sowa argued that Ninth Circuit law does not mandate proof of a relevant market for Section 2 violations, citing the Cornwell Tools Co. case. This case involved a manufacturer claiming monopolistic behavior by a distributor and highlighted the necessity of proving specific intent to monopolize and sufficient market power, though Sowa's interpretation of it as eliminating the need for relevant market evidence was questioned. The text underscores the complexity of allegations regarding monopolization, asserting that understanding the subject of the alleged monopoly is essential in antitrust claims.

Proof of a relevant market is essential to establish a violation of 15 U.S.C. § 2 regarding attempts to monopolize. The court emphasizes that identifying what is being monopolized is crucial. While Sowa cites Lessig v. Tidewater Oil Co. to argue that relevant market proof is unnecessary in attempt cases, this case predates the Supreme Court's ruling in Walker Process Equipment, which clarified that assessing the exclusionary power of a patent requires consideration of the relevant market. The Ninth Circuit has also recognized the necessity of proving the relevant market in several decisions. Additionally, the interpretation of Lessig has been rejected by other courts, reinforcing the requirement for relevant market evidence. Sowa's argument that fraudulent patent procurement should be treated as a per se violation of antitrust laws is countered by the assertion that the patent system does not exempt individuals from antitrust scrutiny. Thus, a fraudulent patent does not equate to an illegal monopoly without further analysis of market power and context.

The district court's dismissal of Sowa's counterclaims under 15 U.S.C. Sec. 1 for antitrust violations and under 15 U.S.C. Sec. 2 for monopolization and conspiracy to monopolize is affirmed. However, the dismissal of Sowa's attempt-to-monopolize counterclaim is reversed, allowing for further scrutiny on remand, particularly regarding the fraud allegation. If Sowa cannot prove fraud, relevant market, or a dangerous probability of success in monopolization, the claim may be dismissed again.

Confusion regarding the terms "intentional fraud" and "technical fraud" was noted, with the court endorsing the Supreme Court's interpretation of "technical fraud" as relating to a mistaken belief about patentability rather than a complete common law fraud. The district judge acknowledged potential confusion in jury instructions regarding the definitions of fraud, materiality, and the applicant's duties, indicating that there was no clear conviction on materiality or intent.

The court emphasized that specific intent, beyond mere negligence or recklessness, is crucial for the attempt-to-monopolize counterclaim based on fraud. The decision to dismiss Sowa's unfair competition counterclaim is also reversed, necessitating reconsideration of the patentability and fraud charges by the district court.

Sowa must articulate specific instances of alleged unfair competition and the resulting injuries it claims to have suffered. The cited cases are insufficient to support its arguments, and its brief on AmHoist's patent activities is inadequate. The court affirms the dismissal of Sowa's counterclaims under 15 U.S.C. §§ 1 and 2 for monopolization and conspiracy but reverses the dismissal of Sowa's unfair competition and "attempt" counterclaims. The court also reverses findings regarding the invalidity of certain AmHoist patent claims due to obviousness and fraud, vacates the attorney's fees award, and overturns the ruling on damages. Disputed factual matters on the obviousness issue necessitate a remand for a new trial per the court's opinion.

The court notes that jury instructions regarding the burden of proof were altered at Sowa's counsel's request, who had previously sought a different approach. AmHoist's counsel did not formally object to the revised instructions, though he acknowledged Sowa's legal citation. The court clarifies that the definition of "allow the application" pertains to claims as they were when the contested conduct occurred. Notably, materiality concerns only information relevant to preventing claims from being allowed. The jury was incorrectly instructed that withheld information must materially influence the examiner. The resolution of the "subjective but for" test is factual and requires examiner testimony, but it also represents a legal conclusion. The distinction between invalidating fraud and unenforceability remains unaddressed for future consideration. Lastly, a reissue application was filed under a now-repealed regulation, necessitating a new oath upon amendment.