Opinion
Civil Action No. 01-2874
July 23, 2002
MEMORANDUM
I. INTRODUCTION
Plaintiffs, James and Robert Whelan, sued defendants, A. Ward Enterprises, Inc. and Allen Ward, for patent infringement, copyright infringement, common law unfair competition, and violation of Pennsylvania's Unfair Trade Practices Consumer Protection Law, 73 Pa. Stat. Ann. § 201, et seq. Defendants failed to answer the amended complaint and a default was entered on December 31, 2001 by the Clerk's office pursuant to Federal Rule of Civil Procedure 55(a). Defendants never moved to vacate the default.
Plaintiffs also sued Hub City Chrome, Midwest Kenworth Olathe, and Alamo Chrome. These defendants settled on October 4, 2001.
A hearing to assess damages was held on Monday, January 28, 2002. Defendant Ward appeared pro se and on behalf of his corporation. At the hearing, plaintiffs sought to enjoin defendants from manufacturing products that infringed their patent, U.S. Patent No. 5,846,617 ("the '617 patent"). In addition, plaintiffs sought to recover damages in the form of lost profits, enhanced damages for willful patent infringement, and attorney's fees. I conclude that plaintiffs have proved lost profits arising from defendants' sale of the infringing devices in the amount of $43,844.00. I also conclude that plaintiffs are not entitled to enhanced damages or attorney's fees. There is no evidence of damages stemming from copyright infringement or unfair competition. I will enjoin plaintiffs from manufacturing and selling infringing devices for the remaining life of the '617 patent.
II. BACKGROUND
The individual plaintiffs are the owners of the corporate plaintiff, Whelan Brothers, Inc. and the inventors of the '617 patent, which consists of a vanity shift knob assembly and a method of replacement for truck transmissions. The '617 patent was issued on December 8, 1998. Plaintiffs are headquartered in New Hope, Pennsylvania and conduct business nationally with various distributors. Defendant Ward is the president and sole owner of the corporate defendant. Defendants are headquartered in Murtaugh, Idaho and produce a competing replacement knob.
The '617 patent summarizes the invention as follows:
Many truck transmissions have shift knob assemblies that contain a removable knob element with a specific bottom configuration and at least one manual switch that relies upon the specific bottom configuration of the knob element to function. The present invention replacement shift knob assembly includes a knob element made from an aesthetically pleasing material such as wood, stone, ceramic of [sic] the like.
A base plate is attached to the bottom of the knob element. The base plate has a first side and an opposite second side, wherein the second side of the base plate is configured to generally physically mimic the specific bottom configuration of the original shift knob being replaced. The base plate is made from a material that differs from the replacement knob element in order to provide the base plate with greater material strength and wear resistance. As a result, a replacement shift knob assembly is provided that is aesthetically pleasing yet contains the same strength and functional elements as does the original knob element that is being replaced.
Defendant Ward began selling decorative truck accessories in 1996 and incorporated A. Ward Enterprises in May of that year. Although there is no evidence as to when defendants began selling the infringing knobs, they have produced financial records showing the gross income the corporation received attributable to knob sales, beginning in fiscal year 1999. In December of 2000, defendants received a cease and desist letter and a copy of the '617 patent from plaintiffs' counsel. Defendant Ward admits that, at that time, he continued to manufacture and sell his competing knobs, believing that his products did not infringe. On February 8, 2001 defendant ceased manufacturing and selling knobs. On March 29, 2001, however, he resumed selling his remaining inventory of knobs on the advice of an attorney whom he briefly had retained. After receiving another cease and desist letter from plaintiffs' counsel on June 18, 2001, defendant Ward stopped selling his knobs and destroyed those remaining in his inventory. At that time, defendant began an attempt to design a knob that did not infringe the '617 patent. He subsequently shared his designs with plaintiffs' counsel in an attempt to learn if these new designs infringed the '617 patent. Plaintiffs claim that the new designs also infringe.
Over the course of three years, defendants sold 452 units that infringed on plaintiff's '617 patent. Plaintiffs sold their knobs for $130 each. Defendants sold the infringing knobs for $105 each. At the hearing plaintiffs presented evidence that distributors began purchasing the competing knobs because they were less expensive and that plaintiffs lost $70 in profits for each lost sale. Plaintiffs also testified that they lost sales of an unpatented replacement collar that knob purchasers bought 90% of the time in conjunction with the patented device.
Following the hearing, defendant Ward submitted a brief with exhibits asserting that the '617 patent was invalid because prior art had preempted it. I do not decide whether plaintiffs' patent is valid because the default precludes my consideration of this affirmative defense. See Thomson v. Wooster, 114 U.S. 104, 114 (1885) (defendants could not question the validity of patent after failing to answer complaint).
III. DISCUSSION Patent Claims Injunctive Relief
Plaintiffs are entitled to an injunction against defendants' manufacturing, using and selling of knobs that infringe the '617 patent because defendants failed to answer the complaint. Section 283 of the Patent Act provides that courts may grant injunctions to protect the rights secured by a patent from infringement. See 35 U.S.C. § 283;W.L. Gore Assocs., Inc. v. Garlock, Inc., 842 F.2d 1275, 1281 (Fed. Cir. 1988) ("[I]njunctive relief against an adjudged infringer is usually granted. "). Although plaintiffs have not proved that defendants' device infringes the '617 patent, the Court of Appeals for the Third Circuit has determined that "[a] consequence of the entry of a default judgment is that `the factual allegations of the complaint, except those relating to the amount of damages, will be taken as true.'" Comdyne I, Inc. v. Corbin, 908 F.2d 1142, 1149 (3d Cir. 1990). Because the complaint alleges that defendants' knobs infringe the '617 patent, for the purposes of the present action plaintiffs' patent has been infringed. Although defendant Ward claims that he has stopped manufacturing and selling the infringing knobs, I will issue an order enjoining him and A. Ward Enterprises from manufacturing, using and selling of knobs that infringe the '617 patent until it expires. See W.L. Gore Assocs., Inc., 842 F.2d at 1281-82 ("The fact that the defendant has stopped infringing is generally not a reason for denying an injunction against future infringement. . . .").
Calculation of Damages for Lost Profits
Plaintiffs have demonstrated that they are entitled to damages in the form of lost profits on the defendants' sales of the infringing knobs. The Patent Act provides: "Upon finding for the claimant the court shall award the claimant damages to compensate for the infringement, but in no event less than a reasonable royalty." 35 U.S.C. § 284. Here, plaintiffs seek to recover the profits they would have made had defendants' infringing devices not been sold.
The Court of Appeals has noted: "To recover lost profits, the patent owner must show `causation in fact,' establishing that `but for' the infringement, he would have made additional profits." Grain Processing Corp. v. American Maize-Products Co., 185 F.3d 1341, 1349 (Fed. Cir. 1999). The patentee bears the initial burden to demonstrate a "reasonable probability" he would have made the asserted sales "but for" the infringement. Id. If the patent owner establishes a reasonable probability of "but for" causation, the burden then shifts to the infringer to demonstrate that the patent owner's causation claim is unreasonable for some or all of the sales. Id. The Court of Appeals for the Federal Circuit has adopted a four-factor test (the Panduit test) that is useful, though not required, for proving entitlement to lost profits damages: (1) demand for the patented product; (2) absence of acceptable non-infringing substitutes; (3) manufacturing and marketing capability to exploit the demand; and (4) the amount of the profit the patent owner would have made but for infringement. See Rite-Hite Corp. v. Kelly Co., Inc., 56 F.3d 1538, 1545 (Fed. Cir. 1995) (en banc opinion),citing Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6th Cir. 1978). The Rite-Hite Court explained:
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. A patentee need not negate every possibility that the purchaser might not have purchased a product other than its own, absent the infringement. The patentee need only show that there was a reasonable probability that the sales would have been 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.Id.
In addition to proving causation by a reasonable probability, a patentee bears the burden of quantifying damages. See Minco, Inc. v. Combustion Eng'g, Inc., 95 F.3d 1109, 1118 (Fed. Cir. 1996). The Minco Court determined that although the trial court may resolve doubts underlying the precise measurement of damages against the infringer, the burden remains on the patentee to prove the amount by a preponderance of the evidence. Id.
In the present case, the reasonable probability exists that plaintiffs would have made the sales defendants made but for defendants' infringement. Plaintiffs have fulfilled each factor enumerated in thePanduit test. Demonstrating product demand, Robert Whelan testified that Pacar, a large company that manufactures trucks, negotiated with him for a lucrative supply contract.
Plaintiff Robert Whelan claimed at the hearing that the presence of defendants' less expensive infringing device on the market prevented his company from receiving the supply contract for the patented knobs from Pacar. (Tr. at 22). Although I will award profits lost by reason of defendants' sales of the infringing devices, there is no reliable evidence as to the amount of consequential damages caused by loss of an on-going contract with Pacar. Therefore, I will not award damages for the allegedly lost contract. See Minco, 95 F.3d at 1118 ("[T]he burden remains on the patentee to prove the amount by a preponderance of the evidence.").
As to the second Panduit factor, there appears to be an absence of non-infringing alternatives to plaintiffs' knob. Assuming that the broadly worded '617 patent is valid, it would be difficult to create a non-infringing vanity replacement shift knob assembly. Although defendant Ward provided some examples of replacement shift knobs that are available on the market, it is not clear that these other knobs do not infringe the '617 patent. To satisfy the third Panduit factor, plaintiff Robert Whelan testified that the failed Pacar contract would have provided plaintiffs with a method of distributing their knobs nationally and internationally. Moreover, Robert Whelan testified that plaintiffs had the capability to make sufficient units to meet the extra demand.
The first independent claim of the '617 patent consists of the following:
A shift knob assembly, comprising:
a knob element having a top end and a bottom end, wherein a relief is disposed in said bottom end; a base plate having a peripheral edge and a center, wherein said base plate is sized to fit within said relief of said knob element; a cylindrical pivot element extending downwardly from said base plate at a point proximate said center of said base plate; at least one spacer extending downwardly from said base plate from a point proximate said peripheral edge of said base plate; and a fastening mechanism for selectively affixing said base plate to said knob element within said relief of said knob element.
Finally, by examining the defendants' sales records and the profit plaintiffs likely would have made per knob sold, one can determine the amount of profits plaintiffs would have made but for defendants' infringement. Defendants' records show that 452 knobs were sold between 1999 and 2001. Robert Whelan testified that plaintiffs' average profit per knob was $70.00. Therefore, I will award plaintiffs $31,640.00 for lost profits resulting from patent infringement.
Defendant Ward offered no significant evidence to rebut Whelan's testimony regarding damages.
Damages For Lost Sales In Shifter Collars
Plaintiffs also contend that under the "entire market value rule" they are entitled to damages resulting from lost sales of an unpatented replacement collar that knob purchasers buy 90% of the time when they purchase knobs. "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. . . ." Rite-Hite, 56 F.3d at 1549. One indication of when the entire market rule should be applied occurs when a patentee normally can anticipate the sale of such unpatented components as well as the patented ones. See Paper Converting Machine Co.v. Magna-Graphics Corp., 745 F.2d 11, 23 (Fed. Cir. 1984) (affirming use of entire market value rule when purchasers always bought both patented and unpatented components simultaneously). Typically, courts employ the entire market value rule when unpatented and patented components are physically part of the same machine, although the rule has been extended to allow inclusion of physically separate unpatented components normally sold with the patented components. Rite-Hite, 56 F.3d at 1549-50.In such instances, however, the unpatented and patented components together must constitute a single assembly, functional unit or be parts of a complete machine. Id. at 1550; see also Lucent Technologies, Inc. v. Newbridge Networks Corp., 168 F. Supp.2d 181, 238 (D.Del. 2001) ("[A]pplication of the entire market value rule is only appropriate where there is a functional relationship between the noninfringing components and the patented invention."). The Rite-Hite Court explained under what circumstances a patentee can collect damages through the entire market rule:
All the components together must be analogous to components of a single assembly or be parts of a complete 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.Rite-Hite, 56 F.3d at 1550.
In the present case, plaintiffs have demonstrated that they are entitled to damages for the lost sales of the replacement collars because they constitute a single functional unit or assembly in conjunction with the replacement knobs. See Rite-Hite, 56 F.3d at 1550 ("[W]hen recovery is sought on sales of unpatented components sold with patented components, . . . the unpatented components must function together with the patented component in some manner so as to produce a desired end product or result."). Robert Whelan testified that replacement collar is a chrome esthetic accessory that is used to replace the standard plastic collar that normally resides at the base of the shifter knob. He testified that although the collar can be sold separately or as a set with the replacement knob, 90% of knob purchasers also choose to buy replacement collars. See Paper Converting Machine Co. 745 F.2d at 23. Moreover, a diagram in the '617 patent demonstrates how a patented replacement knob and unpatented collar function together as a unit to enclose and protect the main housing of the assembly. See Figure 2.
Robert Whelan testified that plaintiffs' average profit per replacement collar was $30.00. If 90% of the defendants' 452 infringing sales had purchased a replacement collar from plaintiffs, plaintiffs would have received $12,204 in profits. Plaintiffs are entitled to receive that amount.
Enhanced Money Damages and Attorney's Fees
Plaintiffs also seek enhanced money damages for willful patent infringement and attorney's fees. Section 284 provides that a court may increase damages up to three times the compensatory amount assessed. Although there is no statutory standard governing the court's discretion, the Court of Appeals for the Federal Circuit has approved such awards where the infringer acted in wanton disregard of the patentee's rights and infringement was willful. Read Corp. v. Portec, Inc., 970 F.2d 816, 826 (Fed. Cir. 1992), overruled on other grounds by Markman v. Westview Instruments, Inc., 52 F.3d 967 (Fed. Cir. 1995) (en banc). A finding of willful infringement, however, does not mandate that the court enhance damages. Id. The Court of Appeals for the Federal Circuit has explained that "[t]he paramount determination in deciding to grant enhancement and the amount thereof is the egregiousness of the defendant's conduct based on all the facts and circumstances." Id. TheRead Court enumerated nine factors that courts should use to determine whether to enhance damages against a patent infringer: (1) whether the infringer deliberately copied the ideas or design of another; (2) whether the infringer, when he knew of the other's patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed; (3) the infringer's behavior as a party to the litigation; (4) the defendant's size and financial condition; (5) the closeness of the case; (6) the duration of defendant's misconduct; (7) any remedial action by the defendant; (8) defendant's motivation for harm; and (9) whether defendant attempted to conceal its misconduct. Id. at 827; see also Transclean Corp. v. Bridgewood Servs., Inc., 290 F.3d 1364, 1377-78 (Fed. Cir. 2002) (affirming district court's use of Read factors).
Applying the Read factors to the present case, I conclude that defendants' actions do not warrant enhanced damages. Plaintiffs have produced no evidence that defendant Ward knew of or intentionally copied their patented knob. Consequently, there can be no inference that defendant Ward had a motivation to harm plaintiffs' business by infringing the patent. Although defendant Ward briefly resumed selling knobs after receiving plaintiffs' first cease and desist letter, he did so in-part on the advice of counsel. Moreover, defendant Ward appears to hold a good-faith belief that the '617 patent is not as broad as plaintiffs contend, demonstrated by his post-hearing submissions of examples of other types of replacement knobs on the market that may constitute prior art. Similarly, he made attempts to design around the '617 patent and mailed blueprints to plaintiffs' counsel for an opinion as to whether his newly proposed design infringed.
Plaintiffs contend that they are entitled to enhanced damages because by failing to answer the complaint defendant Ward deprived them of an opportunity for discovery and that, therefore, they were forced to rely upon the defendants' representations as to how many infringing sales had been made. Plaintiffs, however, could have engaged in discovery despite the absence of an answer. Moreover, in his submissions to this Court, defendant Ward explained that his failure to respond to the complaint was caused by an inability to afford counsel. There is no evidence that defendants' default was a tactical decision made to hamper plaintiffs' suit. Additionally, all evidence suggests that A. Ward Enterprises is a small business and that there is no reason to doubt the truthfulness of the sales figures presented by defendant Ward at the hearing. Therefore, I will not enhance plaintiffs' damage award for patent infringement.
Plaintiffs also request payment of attorney's fees. Title 35 U.S.C. § 285 provides that courts in exceptional cases may award attorney's fees to the prevailing party. Whether a case can be considered "exceptional" is based on a variety of factors; for example, willful or intentional infringement, inequitable conduct before the Patent and Trademark Office, vexatious or unjustified litigation, or other misfeasant behavior. Multiform Desiccants, Inc. v. Medzam, Ltd., 133 F.3d 1473, 1481-82 (Fed. Cir. 1998). "A finding of such `exceptional' circumstances does not, however, mandate an award of attorney fees."Reactive Metals and Alloys Corp. v. ESM, Inc., 769 F.2d 1578, 1582 (Fed. Cir. 1985). In an effort to avoid penalizing a party for merely defending or prosecuting a lawsuit, the Court of Appeals for the Federal Circuit has determined that district courts should not routinely assess attorney fees against a losing party in patent litigation. Revlon, Inc. v. Carson Products Co., 803 F.2d 676, 679 (Fed. Cir. 1986). The decision to award attorney's fees must be made in light of the totality of the circumstances and the party seeking the award bears the burden of proving facts which establish the exceptional character of the case by clear and convincing evidence. Merck Co., Inc. v. Mylan Pharmaceuticals, Inc., 79 F. Supp.2d 552, 555 (E.D.Pa. 2000), citing Machinery Corp. of America v. Gullfiber, 774 F.2d 467, 471 (Fed. Cir. 1985).
Plaintiffs have not demonstrated that the present case is exceptional. As already discussed, defendant Ward engaged in some willful infringement by selling a portion of his remaining stock. The time period, however, appears to have been very brief, approximately six months, and he acted on the advice of counsel. After receiving a second cease and desist letter, defendant stopped selling the infringing devices and destroyed his existing stock. The remaining factors for determining whether the present case is exceptional, such as inequitable conduct before the Patent and Trademark Office, vexatious or unjustified litigation, or other misfeasant behavior, are not applicable in the present case. Therefore, I will deny plaintiffs' claim for attorney's fees.
Copyright Infringement and Unfair Competition
In their complaint, plaintiffs alleged copyright infringement and assert statutory and common law unfair competition claims. Because plaintiffs have failed to demonstrate any damages arising from these claims, I will award no damages with respect to them. See Comdyne I, 908 F.2d at 1149 ("A consequence of the entry of a default judgment is that `the factual allegations of the complaint, except those relating to the amount of damages, will be taken as true.'").
Although plaintiffs raised the subject of copyright infringement at the damages hearing, they presented no evidence as to how they sustained economic injuries beyond those incurred through the patent infringement.See Bowers v. Baystate Technologies, Inc., 112 F. Supp.2d 185 (concluding that plaintiff could not recover lost profits for patent infringement, copyright infringement, and contract damages on same product because damages would be duplicative). Moreover, although plaintiffs were given an opportunity to brief the question whether they can recover both patent and copyright damages with respect to the same product, they failed to do so.
Plaintiffs did not present any evidence of damages arising from their unfair competition claims.
An appropriate order follows.
ORDER
AND NOW, this ___ day of July, 2002, upon consideration of plaintiffs' and defendants' briefs, and the evidence adduced at the damages hearing and for the reasons set forth in the accompanying memorandum it is hereby ORDERED that
• Judgment is entered in favor of plaintiffs James A. Whelan, Robert J. Whelan and Whelan Brothers, Inc. and against defendants Allen Ward and A. Ward Enterprises, Inc. in the amount of $43,844.00.
• Defendants Allen Ward and A. Ward Enterprises, Inc., their agents, employees, heirs, assigns, and those persons in active concert with them who receive notice of this Final Judgment by actual service or otherwise are hereby permanently RESTRAINED and ENJOINED during the life of U.S. Patent 5,846,617 from making, using, selling, or causing to be made products that infringe that patent.
Defendants are informed that they may take an appeal from the Order if they choose to do so by filing a notice of appeal with the Clerk of the District Court (on a form provided by the Clerk) within 30 days from the date of this Order. If defendants cannot afford the filing fee they may request leave to proceed in forma pauperis. The Clerk's office is located on the second floor of the United States Courthouse, 6th and Market Streets, Philadelphia, PA 19106.