Crystal Semiconductor Corp. v. Tritech Microelectronics International, Inc.

Citation: 246 F.3d 1336Docket: Nos. 99-1558, 99-1559 and 00-1006

Court: Court of Appeals for the Federal Circuit; March 6, 2001; Federal Appellate Court

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The United States District Court for the Western District of Texas ruled that OPTi Inc. and TriTech Microelectronics' devices infringed Crystal Semiconductor Corporation’s U.S. Patent Nos. 4,746,899 and 5,220,483. Subsequently, the court granted judgment as a matter of law (JMOL) affirming that Crystal's U.S. Patent No. 4,851,841 was not invalid due to an on-sale bar. At trial, the jury found that TriTech and OPTi willfully infringed all three patents and awarded damages exceeding $48 million. The district court later ruled that Crystal was not entitled to lost profit or price erosion damages, reducing the damages to a reasonable royalty of $10 million, which was subsequently doubled to $20 million due to willful infringement. Crystal was awarded attorney fees but denied prejudgment interest. The appellate court affirmed the district court's finding of infringement and the denial of price erosion damages, while vacating the judgment regarding the on-sale bar due to an error. The court also found that Crystal was entitled to lost profit damages and remanded the case for a recalculation of damages. Crystal, a subsidiary of Cirrus Logic, Inc., holds the three patents related to analog-to-digital (A/D) converter technology, which is essential for converting sound into digital formats used in various electronic devices.

Earlier A/D converters were comprised of multiple separate devices and external components, requiring two or three power supply voltages. In the late 1970s, the semiconductor industry advanced by integrating A/D converters onto a single chip, resulting in smaller, more reliable, cost-effective, and energy-efficient devices. However, this design led to inherent electrical noise issues, particularly from analog input processing components, which interfered with digitizing components and caused digitization errors. Crystal's three patents-in-suit address methods to mitigate electrical noise in integrated-circuit A/D converters.

The '899 patent, issued on May 24, 1988, describes a method utilizing clock signals to control electrical noise, where a first clock samples the analog input voltage while a delayed clock activates the digital circuit, thus preventing interference. The '841 patent, issued on July 25, 1989, claims an A/D converter featuring a delta-sigma modulator and a digital decimation filter, both designed to minimize noise. This patent includes methods for noise reduction through gain scaling and setting feedback reference voltages. The '483 patent, issued on June 15, 1993, pertains to a capacitor structure with a tri-layered insulated design that includes a guarding structure to shield sensitive nodes from noise.

By 1994, Apple and Intel/Windows PCs incorporated audio systems using CODECs, which combine A/D and digital-to-analog conversion on a single chip, facilitating the transformation and processing of analog sound signals. Crystal's A/D converter technology was integrated into these CODEC audio chips, launched in 1991, and provided superior 16-bit digitization compared to earlier 8-bit models. TriTech, which began manufacturing 16-bit audio CODECs in Singapore in 1994, sold these chips worldwide, including to OPTi for distribution in the U.S. PC market under the 'Model 931' name.

By March 1995, Crystal had reverse engineered audio chips from OPTi and TriTech to assess potential patent infringements. On January 10, 1997, Crystal initiated a lawsuit in the U.S. District Court for the Western District of Texas against both companies for infringing its '899, '841, and '483 patents. In January 1998, a special master interpreted the claims of these patents, which the district court subsequently adopted. Crystal filed summary judgment motions asserting that OPTi's Model 931 audio chip infringed the '483 and '899 patents. The district court ruled that the Model 931 infringed specific claims of both patents and left it to a jury to determine if TriTech and OPTi had committed infringement.

The jury trial addressed infringement, validity, enforceability, and damages. The district court granted Crystal's motions for judgment as a matter of law (JMOL), ruling the '841 patent was not invalid due to an on-sale bar and that the '899 and '841 patents were not unenforceable or invalid. Prior to trial, OPTi admitted to infringing certain claims of the '483 patent. The jury found both TriTech and OPTi liable for infringement of multiple claims across the three patents and determined all asserted claims were nonobvious. Damages awarded to Crystal included $11,830,862 in lost profits, $26,649,766 for price erosion, and $10,000,000 in reasonable royalties, split 60% for TriTech and 40% for OPTi. The jury also determined TriTech willfully infringed the patents.

Following the verdict, TriTech and OPTi sought JMOL to overturn the jury’s lost profits and price erosion findings, which Crystal opposed while also seeking prejudgment interest. The district court denied Crystal's claims for lost profits, price erosion, and prejudgment interest but upheld the jury's finding of willfulness, leading to a doubling of Crystal's reasonable royalty to a total of $20,000,000 in enhanced damages. Crystal appealed the denial of lost profits and price erosion, while TriTech cross-appealed various aspects of the trial court's rulings. OPTi settled with Crystal prior to the appeal, and jurisdiction for the appeals is established under 28 U.S.C. 1295(a)(1).

The court reviews a district court's grant of summary judgment without deference, favoring the non-movant in factual inferences. In patent infringement cases, both claim construction and its application to the accused product are essential. Claim construction is a legal issue reviewed without deference, while applying the claim to the accused device is a factual question that receives substantial deference upon review. The infringement analysis relies on the claim language, supported by the written description and prosecution history.

The court also reviews a district court's grant of judgment as a matter of law (JMOL) without deference, applying the same standard as the district court. A JMOL is affirmed if the jury's factual findings lack substantial evidence or do not support legal conclusions. Patent damages are a question of fact, and the court reviews jury damage awards for substantial evidence. A jury’s finding of willful infringement is also a factual issue, requiring substantial evidence for review; the plaintiff must demonstrate by clear and convincing evidence that the defendant acted without a reasonable belief of avoiding infringement.

The court reviews the denial of prejudgment interest for abuse of discretion, which is limited to specific circumstances, and prejudgment interest should typically be awarded under §284 unless justified otherwise. 

Regarding the '483 patent, Claim 1 includes three key components: a substrate, a sub-circuit, and a capacitor with three layers arranged in a specific manner. The first layer is a conductive material like polysilicon, overlaid by a second conductive layer of metal, surrounded by a guarding capacitor structure, with a third metal layer above the second. Each layer is separated by insulating material, forming a trilayered structure as illustrated in Figure 2 of the patent.

Claim 1 describes a capacitor with multiple conductive layers and insulating layers strategically arranged on a semiconductor substrate. The trial court interpreted the phrase 'disposed over a portion' to mean that there must be some overlap between the layers, allowing for various configurations ranging from minimal to full coverage of the underlying surface. It was established that the indefinite articles 'a' or 'an' in patent claims imply 'one or more,' especially in open-ended claims using terms like 'comprising.' Therefore, 'disposed over a portion' implies at least one area of overlap, aligning with the district court's interpretation. The claim does not necessitate a specific layered structure, such as a tiered arrangement, and can encompass capacitors where layers cover the entire underlying surface. The transitional term 'comprising' suggests that the claim is open to additional, unlisted elements, while 'having' does not imply the same openness but does not limit the claim strictly to its recited components. The court concludes that the use of 'having' in claim 1 does not restrict it to only the elements explicitly mentioned.

The '483 patent presents a capacitor design that effectively shields its sensitive plate from external noise. The 'Background of the Invention' section outlines conventional two-plate capacitors, where the top plate functions as a sensitive ground and the bottom plate protects against substrate noise. However, these designs are still vulnerable to noise interference through passivation and packaging. The patented tri-layer structure enhances noise shielding by connecting the first and third layers, which protect the second conductive layer from external noise and substrate interference. 

The upper metal plate shields the sensitive plate from signals above it. The preferred embodiment, illustrated in Figure 6, shows the design covering the middle layer entirely. A fourth conductive layer, or conductive ring, is strategically placed between the contacts and the shielded plate to minimize stray capacitance. The configuration necessitates that the middle layer has a smaller surface area than the upper and lower layers, ensuring that claim 1 of the patent encompasses a structure where the third layer fully covers the second layer. The interpretation of 'disposed over a portion' allows for coverage of at least one part, contrasting with any assertion that it refers to a single area, which would undermine the invention's intent and preferred embodiment.

The accused Model 931 device features layers of similar sizes, with the middle layer being smaller, leading to a literal infringement of claim 1. The court supports the district court's interpretation of the 'over a portion' limitation. Additionally, claim 1 specifies that the conductive ring must be positioned at a 'predetermined distance' from the second layer, which the district court defined as a pre-established distance that ensures effective shielding; this definition is not disputed by the parties involved.

The court must evaluate whether the Model 931 infringes on the claims of the '899 patent based on TriTech's assertions regarding its conductive guard ring structure. TriTech contends that the guard ring is positioned at nearly twice the minimum distance from the second conductive layer, rendering it 'noisy' and ineffective for acceptable shielding. The district court found that the critical issue is the proximity of the guard ring to the second conductive layer rather than its actual performance in shielding against noise. It determined that the Model 931's guard ring is uniformly spaced 1.3 microns from the second conductive layer, affirming summary judgment for literal infringement.

The '899 patent outlines a method to mitigate noise in the analog sampling process by utilizing two clock signals. The first clock controls analog sampling, while the second clock, offset in timing, manages digital logic gate switching to prevent digital noise from interfering with analog signal sampling. In examining claim 4, which is dependent on claim 1, the district court clarified that the term 'first clock signal' does not limit the construction to a singular clock signal and that 'comprising' indicates the claim is open to include multiple clock signals. The patent's preferred embodiment, which describes two analog clocks (ACLK1 and ACLK2), supports this interpretation. Consequently, the district court correctly granted summary judgment, concluding that claim 4 is applicable to the Model 931, which employs four clocks.

TriTech did not practice the '899 method in the U.S. and therefore cannot be liable for direct infringement under 35 U.S.C. § 271(a). However, its sale of a chip to OPTi constitutes active inducement under 35 U.S.C. § 271(b) since OPTi directly infringed the patent by practicing the claimed method. The jury was instructed to assess whether TriTech literally infringed by inducing OPTi's infringement, and the jury found both parties liable for infringement of claim 4 of the '899 patent, which the court upheld without error.

Regarding willful infringement, the district court instructed the jury, and TriTech did not object. TriTech argued against the finding of willful infringement for the '483 and '841 patents, claiming its defenses were non-frivolous. An infringer has a duty of due care to avoid infringement upon receiving actual notice of a patentee's rights. The court clarified that the precedent set in Gustafson, Inc. v. Intersystems Industrial Products, Inc. does not absolve a party from willful infringement merely for presenting a non-frivolous defense after receiving a lawsuit notice. TriTech failed to seek competent legal advice regarding its potential infringement after being notified by Crystal and had prior knowledge of Crystal's patent since 1994. Evidence of TriTech copying Crystal’s patented parts further supported the jury's finding of willfulness, which the court affirmed.

Lastly, under 35 U.S.C. § 102(b), an invention cannot be patented if it was on sale more than one year before the filing date. The Supreme Court case Pfaff v. Wells Electric established that for the on-sale bar to apply, a product must have been offered for sale and the invention must have been ready for patenting. Allegations exist that Crystal sold or offered its CS5316 chip, an embodiment of the '841 invention, before the critical date of October 2, 1986.

Crystal filed a JMOL (Judgment as a Matter of Law) motion to dismiss TriTech's on-sale bar defense, claiming insufficient evidence for a commercial offer for sale of the CS5316. The district court approved Crystal's motion, but the record indicated that a reasonable jury could find evidence supporting an on-sale bar. Notably, on September 11, 1986, Crystal received a purchase order confirmation from E.S.P. Microscape for five CS5316 parts, which was recorded as revenue despite the shipment occurring after the critical date. Crystal contended the order was placed on hold and not accepted until after this date. Additionally, on September 22, 1986, Crystal shipped two CS5316 parts to a distributor, which it described in communications and a Mask Work Registration as the first commercial exploitation of the product. Crystal claimed this shipment was an engineering sample sent for confidential testing, which, if substantiated, could negate the on-sale bar. However, this argument did not eliminate the evidence of potential commercial exploitation, thus warranting a jury's examination. Consequently, the court vacated the JMOL grant and remanded for a trial regarding the on-sale bar issue related to the '841 patent. This remand does not influence the damages calculation, as both parties agreed on the reasonable royalty award without request for recalculation based on patent validity. Damages are governed by Section 284 of title 35 of the U.S. Code, stipulating a reasonable royalty as the minimum compensation for infringement, with Crystal responsible for proving its damages.

Section 287(a) of title 35 stipulates that a patentee cannot recover damages for patent infringement without adequate marking, unless the infringer was notified of the infringement and continued to infringe. Infringement notice is established when a lawsuit is filed. Crystal filed an infringement action against TriTech regarding the '483 and '841 patents on January 10, 1997, which both parties recognize as the date of first notification. However, the notice requirements of §287(a) do not apply to the '899 patent, as it pertains solely to methods. TriTech acknowledged being aware of the '899 patent in 1994, allowing the jury to appropriately calculate damages from that year if infringement was found.

Crystal sought lost profits, needing to prove a causal link between the infringement and its profit losses, specifically showing that it would have made TriTech's sales but for the infringement. It also sought reasonable royalties for infringing sales not included in the lost profit calculation. Crystal claimed lost profits on approximately 42% of TriTech's sales, based on its market share in the high-quality chip segment, where it held an estimated 42% market share. Expert testimony from Mr. Henry Davis, an audio industry consultant, was presented to support this claim. Although TriTech initially moved to exclude Mr. Davis' testimony based on Daubert factors, it later withdrew this motion, leading to the admission of his expert testimony in court.

TriTech admitted Mr. Davis' expert reports prior to his testimony, which the jury included in the record despite TriTech's objections. Mr. Davis classified the PC audio market into 'high quality' and 'low quality' segments, detailing the distinctions in audio quality and purchasing criteria for CODECs. Crystal's marketing executive, Mr. Ensley, corroborated this segmentation, indicating that Crystal led the 'high quality' segment while ESS Technology dominated the 'low quality' segment. Mr. Davis calculated Crystal's market share during the infringement period from 1994 to 1998, using reliable Mercury Research reports and excluding sales from TriTech, OPTi, and ESS. His analysis resulted in Crystal's market shares ranging from 35% to 67%, with an average of 41.9%, leading to a request for approximately $14.3 million in lost profits. TriTech's expert, Mr. Carlile, also analyzed the market but included ESS in his calculations, yielding a lower market share range of 19% to 44%. OPTi's expert, Ms. Scott, used a different segmentation theory, initially estimating Crystal's market shares at 24% to 56%, later adjusting them to 12% to 78%. The jury awarded $11,880,862 in lost profits, representing about 35% market share for Crystal. However, the district court later granted TriTech's motion for judgment as a matter of law (JMOL), deeming Mr. Davis' testimony unreliable and insufficient for such a substantial award due to his limited qualifications and reliance on published data. The court noted that, had TriTech not pre-admitted the reports, it would have excluded Mr. Davis' testimony. While the court acknowledged a potential jury-supported award of $7.4 million in lost profits, it ultimately decided that Crystal failed to prove entitlement to any lost profits, stating it could not claim both lost profits and reasonable royalties.

The district court's decision nullified the jury's lost profits award and did not increase the reasonable royalty award, resulting in Crystal receiving no compensation for about 42% of the infringing sales. Under 35 U.S.C. 284, the Patent Act requires at least a reasonable royalty for each infringing sale, which the trial court failed to recognize. The court overlooked Crystal's market share in the audio chip market, impacting the determination of "but for" causation necessary for claiming lost profits. The precedent set in Grain Processing Corp. v. Am. Maize-Prods. illustrates that a patentee must provide credible economic evidence to reconstruct the market absent the infringement. Historical cases, such as State Industries, affirm that a patentee can recover lost profits based on market share demonstrated by reliable evidence. Crystal was deemed entitled to a minimum of 21.8% market share, equating to $7.4 million, which the district court erroneously denied. Expert testimonies supported that Crystal should receive a lost profit award, albeit less than the claimed 42% market share. The jury ultimately awarded a 35% lost profit, supported by sufficient evidence including expert and fact witness testimonies. The court emphasized the need for precise identification of the affected market segment where similar products compete, as established in BIC Leisure. Crystal’s witness indicated that ESS, while selling audio chips at similar prices, targeted a different market segment focused on integration over sound quality, affecting market share calculations.

Mr. Edelson, an OPTi witness, disputed Crystal's segmentation theory but confirmed that ESS produced a low sound quality product, emphasizing the importance of sound quality for companies purchasing PC audio CODECs. OPTi's expert, Ms. Scott, differentiated the audio chip market by usage—motherboard versus add-in—rather than quality, supporting the notion that the market is not uniform or completely elastic. This evidence justifies the jury’s lost profit award for Crystal's market share through market segmentation, irrespective of Mr. Davis’ expert opinion, whose reliability does not need to be evaluated by the court. 

Crystal's claim of additional lost profits due to price erosion aligns with established legal precedent allowing damages for price reductions caused by infringing competition. The burden is on the patentee to prove that, without infringement, it would have sold at higher prices, necessitating evidence of potential sales volume at those prices. Crystal’s theory of price erosion was supported by Mr. Stephen Knowlton’s expert testimony, which employed a benchmark methodology comparing Crystal's audio CODEC sales in the Apple market with its sales in the PC market affected by infringement. Notably, neither TriTech nor OPTi sold products in the Apple market, where only Crystal and National Semiconductor provided CODECs, collaborating with Apple to market their products.

Crystal supplied 70% of Apple’s CODECs, with National providing 30%. Mr. Knowlton analyzed the performance of chips in the Apple market against nine of Crystal’s products in the PC market from 1994 to 1998. He found that CODECs sold in the benchmark market had approximately a 49.8% gross margin and experienced a 10% price decrease over 17 quarters. He calculated a hypothetical selling price for Crystal’s products in the Apple market, accounting for the price drop, attributing the entire decrease in selling prices to TriTech/OPTi’s infringement. His calculations indicated a price erosion of $1.94 per unit at the upper end and $0.89 per unit at the lower end, leading to potential damages of $34,700,000 based on the lower figure. The jury awarded $26,649,766 in damages. However, the district court granted TriTech's motion for judgment as a matter of law (JMOL) to reduce Crystal's damages, deeming Mr. Knowlton's methodology unreliable. The court found that even if his opinion were reliable, it lacked substantial evidence to support claims of price erosion. Upon review, the appellate court affirmed the district court's judgment, noting that Mr. Knowlton's benchmark was inappropriate due to significant differences between the Apple and PC CODEC markets. The Apple market, characterized by an oligopoly with only two suppliers (Crystal and National), showed less competition, while the PC market was competitive with multiple manufacturers. Pro rata supply agreements and a cooperative relationship between Crystal and National further limited competition. Additionally, competitors like Yamaha and ADI struggled to enter the Apple market, indicating entry barriers. The evidence demonstrated that the Apple market's demand characteristics were dissimilar to those of the larger, more competitive PC market, leading to the conclusion that using the Apple market as a benchmark was fundamentally flawed.

Crystal contends that TriTech's and OPTi's experts failed to provide a suitable benchmark for assessing the PC CODEC market. Despite the absence of a comparable market, it is insufficient to rely on a flawed benchmark to demonstrate the market's likely reaction absent infringement. Economists can construct hypothetical markets and estimate demand curves without inappropriate benchmarks, as illustrated in prior cases where price erosion was calculated based on pre-infringement pricing. Even if Mr. Knowlton's analysis were accurate, there is inadequate evidence showing how the market would have reacted if Crystal had attempted to raise its prices by at least 89 cents per CODEC.

According to the law of demand, higher prices typically reduce the quantity demanded, unless inelastic conditions exist, which are rare. Most markets exhibit elasticity between these extremes, leading to decreased sales with price increases. The PC CODEC market is competitive, thus a price increase would likely result in reduced sales for Crystal due to customer substitution for competitors' products. Crystal has not demonstrated the demand elasticity of the PC CODEC market or estimated potential sales losses from a price increase. Consequently, there is no sufficient evidence to establish "but for" causation regarding price erosion. Crystal's argument that CODECs are inexpensive components in a costly machine and would not impact sales is deemed unconvincing.

The proportion of consumer income allocated to a good, such as the cost of a sound card CODEC, influences price elasticity of demand, but a low proportion does not negate it. Crystal's claim that widespread inclusion of audio chips in personal computers indicates robust demand, even with small price increases, fails due to insufficient evidence of price erosion. The market exhibited high demand and competition, yet Crystal did not provide adequate proof that raising prices would not allow competitors to fill the demand at lower prices or that barriers to entry existed to prevent this. Additionally, Crystal did not demonstrate how a hypothetical price increase would impact its profits from lost sales, as lost sales and price erosion damages are closely related. The court emphasized that damages from price reductions are treated similarly to lost sales damages to avoid inconsistent outcomes. Prior case law indicated that for lost profits to be established, there must be a clear market interaction between the patentee and infringer. Crystal's evidence suggested market segmentation by quality rather than price, and it failed to show how potential price increases could alter market segmentation or allow for both lost profits and price erosion damages for the same sales. Consequently, the district court denied Crystal's claim for price erosion damages due to lack of sufficient support, while affirming a $10 million reasonable royalty award against TriTech for willful patent infringement.

TriTech contends that the district court erred by doubling the total damages award since OPTi was not found to willfully infringe. TriTech argues that the trial court should have applied a multiplier of 0.6 to the damages based on TriTech’s 60% liability, and only doubled the damages for its own willfulness. As established in Hewlett-Packard Co. v. Bausch & Lomb Inc., a party that induces or contributes to infringement is jointly and severally liable for all general damages. TriTech, having induced all infringing sales by OPTi, is therefore jointly and severally liable. However, punitive damages for willfulness are reserved for parties found to willfully infringe, as recognized in Sensonics, Inc. v. Aerosonic Corp. Consequently, damages cannot be multiplied for TriTech’s willfulness, but TriTech is liable for punitive damages due to its inducement of all infringing sales.

The jury assigned 60% of the damages to TriTech, amounting to $21,830,862 in punitive damages plus an additional 60% of that amount for its share of liability, resulting in a total of $34,929,379 owed to Crystal, excluding attorney fees. Regarding prejudgment interest, Crystal sought this assessment, but the district court denied it, citing two reasons: significant delays by Crystal in filing the suit and litigation tactics that prolonged the case. The Supreme Court in General Motors established that prejudgment interest is typically awarded to compensate a patentee for lost use of funds due to infringement, though undue delay in prosecution can justify withholding it. The court noted that absent prejudice to defendants, a patentee’s delay does not justify denying prejudgment interest. Crystal initially asserted its patents against Analog Devices, leading to a 1994 consent judgment, and then investigated potential infringement by TriTech and OPTi, which Crystal claims took two years. TriTech, however, provided evidence suggesting that Crystal’s delay was a litigation tactic.

Crystal did not notify TriTech or OPTi of their patent infringement, despite having determined that such infringement was occurring. Mr. Clardy indicated two reasons for this lack of communication: first, Crystal believed that TriTech and OPTi were already aware of its patents due to their efforts to enhance product quality in infringing ways; second, Crystal aimed to foster a business relationship with Creative Technologies, which was connected to TriTech and OPTi, to provide audio CODECs. Crystal's two-year delay in filing the lawsuit exacerbated the damages owed by TriTech and OPTi. The evidence suggests that this delay was self-serving and prejudicial to the defendants, leading the district court to deny Crystal prejudgment interest.

The court affirms the district court's interpretation and judgments regarding the willful infringement of the '899, '841, and '483 patents by TriTech. However, it also affirms that Crystal is not entitled to price erosion damages or prejudgment interest. The court vacates the district court’s judgment regarding the '841 patent's validity concerning the on-sale bar and remands for trial. Furthermore, the court reverses the district court's ruling denying Crystal lost profit damages, vacates the damages order, and remands for the entry of damages totaling $34,929,379 to be paid by TriTech. Each party will bear its own costs. The decision is affirmed in part, reversed in part, vacated in part, and remanded.