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Minco, Inc., Plaintiff/cross-Appellant v. Combustion Engineering, Inc.
Citations: 95 F.3d 1109; 1996 WL 511532Docket: 96-1005
Court: Court of Appeals for the Federal Circuit; November 17, 1996; Federal Appellate Court
In the case of Minco, Inc. v. Combustion Engineering, Inc., the United States Court of Appeals for the Federal Circuit upheld a district court's ruling regarding patent infringement involving patent 4,217,462 ('462 patent), which pertains to a rotary furnace for fusing minerals. The court determined that Combustion Engineering, Inc. (CE) willfully infringed claims 3 and 4 of the patent, which were found to be valid and enforceable, rejecting claims of laches. The district court awarded damages totaling $21,727,016.80, which included doubled damages due to willful infringement, as well as attorneys' fees and pre-judgment interest.
The rotary furnace, developed by Ken Jenkins and William Rawles after Jenkins left CE, provided significant improvements over CE's previous kiln, producing higher quality fused silica with less discoloration and contamination. Minco, Inc., formed by Jenkins and his sister, successfully commercialized this new technology, experiencing significant sales growth from 1979 to 1985. The patent application for the rotary furnace was filed in 1978, with the '462 patent issued in 1980. Ownership of the patent transferred from Rawles to Verneil Richards in 1988, and subsequently, Minco Acquisition Corporation (MAC) acquired Minco and the patent, completing the transaction with a series of assignments.
At the request of CE and others, the Patent and Trademark Office (PTO) reexamined the patent, ultimately deeming claims 1 and 2 related to the rotary furnace as obvious based on prior art. Modified claims 3 and 4, which focus on a rotary furnace designed for continuous electric heating and/or fusion of mineral-bearing substances, were issued to Minco on October 12, 1993. These claims detail a furnace with features such as a cylindrical housing and both fixed and removable conical extensions, along with a crane support for lifting and tilting the furnace to remove contents. The examiner noted that no prior art included a crane support on both the housing and the removable end, allowing for easier transport and dumping of the finished product.
Minco's success negatively impacted CE’s market share, leading to a 20% decline in sales in 1985. In response, CE attempted to create a similar furnace but was unsuccessful. After acquiring the '462 patent in December 1983, CE engaged consultant Nick Valk to help design a kiln to produce high-quality silica. Valk's work led to the development of CE's RT kiln, which features a main cylindrical housing and detachable conical extensions. The kiln's operation involves using a crane to lift and detach the conical extension, allowing the furnace to tilt and dump the fused silica.
The trial court ruled in favor of Minco after a bench trial held from August 16 to August 23, 1994, and CE subsequently appealed the judgment, contesting various issues including infringement and damages. Minco also cross-appealed regarding denial of certain damages related to lost profits and price erosion. The appellate court found sufficient factual findings from the trial court to support its decision, particularly affirming CE's willful infringement based on the trial court’s conclusions.
The district court's interpretation of claim construction in the patent appeal was well-supported by the record, as established in Markman v. Westview Instruments, Inc. Claims 3 and 4 of the '462 patent require two crane supports—one on the main housing and another on the removable conical extension—to facilitate lifting and tilting the housing for content removal. The trial court clarified that the crane supports do not need to directly lift or tilt the housing; rather, they are involved in the process by connecting the furnace to the crane. The specification reinforces this interpretation, indicating that the removable extension must be detached before the tilting process occurs, affirming that the crane support contributes to, but does not perform, the lifting and tilting functions.
Consequently, the district court found that the patent claims were applicable to the accused RT kiln and detected no clear error in this factual determination, leading to the affirmation of the trial court's finding of literal infringement. The court also addressed CE's request for intervening rights related to changes made during reexamination of claim 3. Although the term "housing" replaced "furnace," the claims retained their original effective date as the scope remained unchanged. The original claims used "furnace" in both broad and narrow senses, with the specification clarifying that the term often referred to the barrel-shaped housing alone. Thus, the changes did not alter the interpretation or applicability of the claims.
Claims in the patent do not require the lifting and tilting of the entire furnace system, including drive mechanisms; rather, substituting 'housing' for 'furnace' clarifies the scope of element D in claims 3 and 4. The court upheld the trial court's ruling allowing recovery of damages for the full infringement period. A patent must disclose the best mode the inventor contemplates for executing the invention, as per 35 U.S.C. § 112. Compliance is assessed based on the inventor's intent at the time of patent application, with findings reviewed for clear error post-bench trial. To invalidate a patent for non-compliance with the best mode requirement, an accused infringer must demonstrate that the inventor knowingly concealed a better method than what was disclosed, showing that the inventor had considered an alternative superior method. The specification does not need to detail production methods, provided the means to practice the invention are disclosed.
In this case, the patent claims mention crane supports on both the housing and detachable conical extension, but do not specify a preferred quantity. The patent drawings show one off-center crane support on the housing and another on the extension. Minco operated a furnace prior to filing claims 3 and 4, utilizing two crane supports on the cylindrical housing, which Jenkins indicated was a production choice rather than a superior method. This decision was influenced by the need to add more tires to the drive system for different minerals, preventing the use of the off-center configuration depicted in the patent drawings. Jenkins affirmed there was no intention to conceal a better mode of operation.
The trial court found that CE did not provide clear and convincing evidence of concealment of the best mode related to the patent in question. For concealment to be established, it is necessary to demonstrate that the inventor recognized one mode as superior to those disclosed in the patent specification. The trial court, after evaluating Jenkins' testimony, concluded that he did not consider Minco's three-crane-support system to be superior to the two-crane-support system depicted in the patent drawing, thus negating CE's claim of a violation.
Regarding the assignment of rights to sue for past damages, the patent assignment agreements transferring the '462 patent from Jenkins and Richards to Minco lacked explicit language granting the right to sue for past infringement. Nevertheless, the trial court allowed Minco to recover damages for infringement that occurred prior to the assignment. Under the Patent Act, only patentees, including successors in title, can bring infringement actions. An assignment must involve a complete transfer of patent rights, while a mere license does not grant this authority. Although the general rule is that past infringement rights are not transferred with the patent assignment, an assignee may sue for past infringement if the assignment explicitly includes that right. The court noted that while no specific wording is mandated to convey this right, the intent to transfer must be clear in the assignment agreement.
Determining the right to sue for prior infringement hinges on the interpretation of assignment agreements, governed by Tennessee state contract law, which emphasizes the ordinary meaning of written intent. The assignment documents clearly state that Richards obtained the right to sue for past infringement from Rawles, allowing both Jenkins and Richards to hold this right when they assigned their interests in the '462 patent to MAC. MAC later assigned its interests to Minco, thereby granting Minco the right to sue for past infringement.
CE challenges the validity of the assignment to MAC, arguing that the general language of transferring "all right, title, and interest" does not typically include past infringement rights. However, the MAC assignment explicitly states that Richards received all rights from Rawles, including rights of action for past infringement. This explicit reference expands the interpretation of "right, title, and interest" to encompass the right to sue for prior infringement. Additionally, Jenkins and Richards relinquished any rights to recover for infringement, solidifying that MAC received full patent rights as if no prior agreements existed.
The assignment from MAC to Minco maintained the terms of the MAC assignment, ensuring that Minco inherited the right to pursue past infringement claims.
In terms of damages, CE appeals the trial court's award and finding of willful infringement, while Minco appeals the denial of lost profits related to price erosion and compensatory damages linked to CE's sale of infringing products. Under the Patent Act, damages should adequately compensate for infringement, including reasonable royalties and potential lost profits. The trial court has discretion in determining damages methodologies based on the specific economic context of the case.
To recover lost profits, a patent holder must demonstrate that the infringer caused the economic harm for which compensation is sought, requiring evidence of a reasonable probability that the holder would have made the profits absent infringement. Causation and the amount of the award must both be proven by the patent holder, with the trial court's findings subject to review for clear error. In cases where causation is established, doubts regarding the precise measurement of damages can be resolved against the infringer, but the burden remains on the patentee to prove the amount by a preponderance of the evidence.
In assessing damages under section 284, the trial court employed the sale of fused silica as a baseline, allowing the patent holder to recover for injuries foreseeably caused by the infringement, not limited to diverted sales of the patented product. CE's infringement was determined to have reasonably foreseen harm to Minco's sales in the fused silica market, resulting in a finding that Minco was entitled to lost profits on diverted sales. Specifically, the district court found Minco lost sales of 26,201,956 pounds of fused silica, equating to $3,455,329 in lost profits from May 1988 to July 1990.
CE contested these findings by arguing the existence of non-infringing alternatives in the market, which could reduce Minco's likelihood of making those sales. However, the district court noted strong demand for Minco's product and that competitors had exited the market due to the '462 patent. The evidence indicated that CE was viewed as a last-resort supplier before the infringement, supporting the conclusion that Minco had a reasonable probability of achieving the lost sales but for the infringement.
CE's damages expert indicated that CE could have designed a non-infringing alternative to the patented Minco kiln, but evidence demonstrated that CE chose to copy the kiln instead. Testimony revealed that CE was aware that cradle support systems could serve as substitutes for crane supports; however, there was no marketplace evidence of such substitutes being utilized by either CE or other manufacturers. The trial court found that CE would not have competed effectively against Minco without the infringement and that Minco would have made significant additional sales during the 1987-1990 period, justifying the award of lost profits.
The Patent Act allows for damages to include both lost profits and reasonable royalties on sales not covered by lost profits. The district court awarded a reasonable royalty on CE's sales beyond 95% of Minco's capacity from May 1988 to July 1990 and for CE's sales from 1986 to April 1988, totaling approximately 122,329,000 pounds. The district court calculated a reasonable royalty based on a hypothetical negotiation, awarding Minco a 20% royalty on CE's applicable sales. This decision was supported by several factors: CE and Minco were direct competitors, CE's product was inferior, there were no non-infringing alternatives, CE acknowledged the invention's significance, and the industry had high profitability rates. The court found no clear error in this assessment, affirming the royalty award based on the economic evidence indicating that a 20% licensing rate would have been acceptable to hypothetical negotiators.
Minco's request for lost profits due to price erosion in the fused silica market was denied by the trial court. To establish price erosion damages, a patentee must demonstrate that higher prices would have been achievable but for the infringement. The evidence showed fluctuations in fused silica prices, with Minco's average price increasing in 1988 despite CE's conversion to infringing kilns in late 1987. This suggests that factors other than infringement influenced pricing, including Minco's role as a market leader in pricing strategies. The trial court found that price erosion damages were speculative, as there was insufficient evidence that consumers would have accepted higher prices in subsequent years.
Regarding CE's sale of its fused silica business to Imetal, Minco argued for damages based on the difference between the sale price and its expert's valuation without the infringing kilns, amounting to $34,634,527. However, the district court denied recovery, citing a lack of evidence supporting Minco's claim that the infringing kilns significantly impacted the sale. After acquiring CE's business, Imetal replaced the infringing kilns with its patented furnace, indicating that the kilns were not a crucial factor in the sale. The court found no evidence to suggest that Imetal's motivations for the purchase were influenced by CE's infringement, concluding that Minco failed to demonstrate entitlement to damages.
Minco failed to prove entitlement to compensation beyond lost profits and reasonable royalties for CE's sale, which benefitted from goodwill generated through infringement. The district court's reasonable royalty award already accounted for any goodwill, as it set a high rate based on the competitive nature of Minco and CE. The court noted that awarding additional damages from CE's sale could lead to double recovery, particularly since Minco’s expert relied on profit increases that had already been included in the royalty calculation.
The trial court posited that, under a hypothetical negotiation in 1986, CE would have agreed to pay a high royalty to Minco without incurring further obligations upon selling its business. Minco bears the burden of proof for additional damages, which it did not meet. The court affirmed the trial court's decisions on claim construction, intervening rights, and the right to sue for past damages, finding no legal errors or clear errors in its findings. Each party would bear its own costs, and the affirmation included a note regarding the inventor's obligation to disclose the best mode of the invention, which the court found CE did not violate.
The patent assignment agreements transferring the '462 patent from Jenkins and Richards to Minco lack explicit language granting the right to sue for past infringement, often referred to as "magic words." Despite this, the trial court allowed Minco to recover damages for infringement that occurred before the assignment date. Under the Patent Act, only patentees can initiate infringement actions, which includes both original patent holders and their successors. Patents can be transferred through legal agreements, with assignments transferring title and licenses retaining it with the original owner. For an assignment to be valid, it must convey either the entire exclusive patent right, an undivided interest, or the exclusive rights within a specific geographic area. An assignee can sue for infringement, while a licensee requires the patent owner's involvement. Generally, the right to recover damages for past infringements does not transfer with the patent unless explicitly included in the assignment. Historical cases emphasize that an assignment does not inherently confer the right to sue for past infringements, and such intent must be clearly manifested in the agreement. There are no strict requirements for the language used in the assignment, but the determination of whether the right to sue has been transferred relies on the interpretation of the assignment agreements under state contract law, specifically Tennessee law in this case. In Tennessee, the language in contracts is construed according to its usual meaning, and the overall context of the agreement informs the interpretation of individual provisions.
Richards obtained the right to sue for past infringement from Rawles, which allowed both Jenkins and Richards to hold this right when they engaged with MAC. They assigned all rights in the '462 patent, including the right to sue for past infringement, to MAC, which subsequently transferred its interests to Minco. CE contests the validity of the assignment to MAC, arguing that a general assignment does not typically include the right to sue for past infringement. However, the MAC assignment explicitly states that Richards received all rights from Rawles, including rights of action for past infringement. This explicit reference broadened the scope of the assignment, confirming that Jenkins and Richards retained no rights to sue or recover damages for infringement. The assignment to Minco, which incorporated the MAC terms, solidified Minco's ability to sue for past infringement.
Regarding damages, CE contests the trial court's award and the finding of willful infringement, while Minco appeals the refusal to award lost profits for price erosion and compensatory damages related to CE's sale of infringing products. The Patent Act mandates compensation for infringement, including potential lost profits, price erosion, and increased costs resulting from infringement, with the court holding discretion over damage calculation methods. To recover lost profits, the patent holder must demonstrate that the infringer caused the economic harm, requiring evidence of a probable loss of profits absent the infringement.
In King Instruments Corp. v. Perego, the Federal Circuit articulates the standards for reviewing a trial court's findings on causation, burden of proof, and the assessment of damages in patent infringement cases. The court reviews causation findings for clear error, with the patent holder responsible for proving the amount of the award. Quantum, also a factual issue, is similarly reviewed for clear error. Once causation is established, the trial court may resolve doubts regarding damage measurement in favor of the patent holder, although the burden of proof remains on the patentee to demonstrate the amount by a preponderance of the evidence.
The district court ruled that Minco was entitled to lost profits due to CE's infringement, quantifying the losses at 26,201,956 pounds of fused silica, equating to $3,455,329 in lost profits from May 1988 to July 1990. CE contested these findings, citing the presence of non-infringing alternatives in the market, which could potentially reduce Minco's sales likelihood. However, the district court determined that Minco's product had significant demand and was preferred over other competitors, leading to the conclusion that Minco would likely have secured these sales absent the infringement.
Evidence indicated that CE chose to copy Minco's kiln rather than develop a non-infringing alternative, undermining CE's argument. The court upheld the district court's damage assessment, affirming Minco's reasonable probability of sales but for CE's infringement.
CE's expert testimony indicated that CE was aware that cradle support systems could replace crane supports; however, no evidence showed that such substitutes were utilized in the market by either CE or other manufacturers of fused silica. The trial court determined that without the infringement, CE would not have been able to compete effectively against Minco. The evidence supported the conclusion that Minco could have sold an additional 26,201,956 pounds of fused silica from 1987 to 1990, justifying the trial court's award of lost profits.
Under the Patent Act, damages can include both lost profits and a reasonable royalty for sales not covered by lost profit calculations. The district court awarded CE a reasonable royalty for sales exceeding 95% of Minco's manufacturing capacity from May 1988 to July 1990 and for sales from 1986 to April 1988, totaling approximately 122,329,000 pounds of fused silica. The reasonable royalty was determined through a hypothetical negotiation framework, resulting in a 20% royalty rate on CE's relevant sales, based on findings that CE and Minco were direct competitors, CE had an inferior product, there were no non-infringing alternatives, CE viewed the invention as a significant advancement, and the industry had high profitability.
Furthermore, the trial court denied additional lost profits claimed by Minco due to price erosion, citing that to establish such damages, Minco needed to prove it could have charged higher prices but for the infringement.
Price fluctuations in the fused silica market are outlined, showing Minco's average price rose from $0.2530 per pound in 1987 to $0.269 in 1988, before falling to $0.255 in 1989 and $0.220 in 1990. CE began using infringing kilns in November 1987 and exclusively sold fused silica from RT kilns by April 1988. Despite the infringement, Minco's prices increased in 1988, suggesting that factors other than infringement affected price changes. Minco was identified as a market leader in price cuts, and while the trial court could have linked Minco's pricing strategies to CE’s infringement, the evidence allows for alternative interpretations. The record does not support claims that consumers would have accepted higher prices in 1989 and 1990, leading the district court to conclude that price erosion damages were speculative. The case of Minnesota Mining & Manufacturing Co. v. Johnson does not mandate price erosion damages in all circumstances of price decline within a market primarily dominated by the patent holder and infringer. The district court evaluated the economic evidence and found that infringement was not the cause of the price decreases during the infringement period.
Minco also contested the district court's refusal to grant compensatory damages related to CE's sale of its fused silica business to Imetal in July 1990, seeking $34,634,527 based on the difference between the sale price and an estimated valuation of CE's business without the infringing kilns. The court found insufficient evidence to support this claim. Although Minco argued that the infringing kilns significantly influenced the sale, the district court concluded that they were not a crucial factor, especially since Imetal transitioned to its own patented furnace by December 1991. The absence of evidence regarding Imetal's motivations or the broader industry context further weakened Minco's position. Thus, Minco failed to demonstrate that it would have been purchased in the absence of CE's infringement. Additionally, any potential profits CE made from goodwill linked to the infringing kilns did not entitle Minco to compensation beyond its claims for lost profits and reasonable royalties.
Minco has received reasonable royalty compensation for any goodwill CE gained through infringement, as determined by the district court, which set a high royalty rate due to their competitive relationship. The court noted that CE's need to protect its market share would lead to acceptance of this high rate, implying that part of the payment was for goodwill derived from the infringement. Concerns arose regarding potential double recovery if Minco sought additional damages from CE’s sale, especially since Minco's expert based valuation on CE's increased gross profits during infringement—profits already considered in the royalty award. The court indicated that a hypothetical negotiation in 1986 would have resulted in CE agreeing to high royalties while not paying further when selling its business. Minco, however, failed to demonstrate a basis for additional damages, not meeting the burden of proof required. The court found no clear error in the trial court's ruling that Minco did not establish entitlement to further compensation. The appellate court affirmed the trial court's decisions on claim construction and related matters, concluding that the findings were supported by the record and free from legal error. Each party is responsible for its own costs. Additionally, the document mentions that failing to disclose the best mode for an invention can lead to invalidity, regardless of intent.