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A Simple Allegation Regarding Willfulness and Establishing Knowledge of the Patent Prior to the Suit Is Sufficient to Meet the Pleading Requirements and Failure to Move for SJ on Willfulness Does Not Indicate an Intent to Abandon That Claim

September 05, 2007

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Last Month at the Federal Circuit - October 2007

Judges: Mayer (author), Rader, Moore

[Appealed from: N.D. Ill., Judge Der-Yeghiayan]

In Mitutoyo Corp. v. Central Purchasing, LLC, Nos. 06-1312, -1343 (Fed. Cir. Sept. 5, 2007), the Federal Circuit affirmed the district court’s grant of SJ of infringement to Mitutoyo Corporation and Hexagon Metrology Nordic AB (collectively “Mitutoyo”) and its dismissal of Mitutoyo’s exclusive distributor as a party, but reversed the district court’s dismissal of Mitutoyo’s willful infringement claim. The Federal Circuit also affirmed-in-part and reversed-in-part the district court’s damages award, and remanded for a proper accounting.

Mitutoyo owns U.S. Patent No. 4,743,902 (“the ’902 patent”), which relates to a device for electronically measuring the movement of one object in relation to another, e.g., the movement of a caliper’s slide relative to its scale. In 2003, Mitutoyo and Mitutoyo America Corporation (“MAC”) sued Central Purchasing, LLC (“Central”) for infringement of the ’902 patent and breach of contract. They alleged that Central’s sale of digital calipers infringed the ’902 patent, both literally and willfully, and breached their 1994 settlement agreement—which resolved a 1992 patent infringement dispute involving the ’902 patent and provided that Central would refrain from any future importation or sale of infringing products.

With respect to infringement, the parties’ dispute turned only on whether the accused devices met the “phased position identification” limitation of claim 1 of the ’902 patent. The parties stipulated that this term meant “[t]he amount by which the received signal is displaced or shifted in time relative to a supply electrode signal.” Slip op. at 3. Based on this claim construction and Central’s admissions, the district court granted SJ of infringement to Mitutoyo, finding that Central literally infringed the ’902 patent. In light of its infringement ruling, the district court also found Central liable for breach of contract. However, the district court dismissed Mitutoyo’s willfulness claim, finding that Mitutoyo had insufficiently pled and failed to properly prosecute that claim.

The district court also found that MAC was not a proper party to the action because it lacked standing. The district court found that MAC did not possess the exclusive right to sell in the United States under the ’902 patent, as required to maintain licensee standing. With respect to damages, the district court found that Mitutoyo was not entitled to a lost profit award because it failed to establish any market overlap between its and Central’s goods. The district court did, however, award Mitutoyo damages based on a reasonable royalty using a 29.2% royalty rate. It determined that this rate was appropriate because Mitutoyo would not have accepted less than its profit margin of 29.2%, given Central’s anticipated profit margin of 70%. In addition, in calculating the royalty base, the district court included sales of the accused calipers by Harbor Freight Tools USA, Inc. (“HFTUSA”), an independent corporate entity with an owner different from Central’s.

Central appealed as to infringement and the royalty. Mitutoyo and MAC cross-appealed as to willful infringement, MAC’s standing, and lost profits.

On appeal, Central argued that its devices did not literally infringe the ’902 patent because the signal recorded by the receiving electrode in its devices was a sinusoidal wave, whereas the signal  generated by the supply electrode was a square wave. Because these waves could not be directly compared to determine the phase angle between them, Central argued that its accused devices did not satisfy the “phase position identification” limitation. Rejecting this argument, the Federal Circuit concluded that neither the stipulated claim construction nor the language of claim 1 required calculation of the phase angle by direct comparison of the supply signal and the received signal. Instead, noted the Court, they merely required the phase angle to be calculated based on some comparison of those two signals, even an indirect one. Further, citing Phillips v. AWH Corp., 415 F.3d 1303, 1315 (Fed. Cir. 2005), the Court concluded that its understanding of the “phase position identification” limitation was consistent with the specification, which expressly provided for determination of the phase angle via an indirect comparison. Accordingly, the Federal Circuit affirmed the district court’s grant of SJ of infringement.

Regarding the district court’s dismissal of Mitutoyo’s willful infringement claim, the Court noted that it construed the district court’s dismissal of that claim as a dismissal for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure and, alternatively, as a dismissal for failure to prosecute under Rule 41(b). The Court observed that both grounds for dismissal were procedural issues not pertaining to patent law and that it would review them under regional circuit law (here, Seventh Circuit law). The Court noted that in its complaint, Mitutoyo alleged that “[t]he acts of infringement by Central . . . have occurred with full knowledge of [the ’902 patent] and have been willful and deliberate,” slip op. at 8, and provided other details that established that Central had knowledge of the ’902 patent prior to 2002. The Court concluded that this was “plainly more than sufficient to meet the requirements of Rule 8(a)(2) for pleading a willful infringement claim and to avoid dismissal under Rule 12(b)(6).” Id. Accordingly, the Court held that, to the extent that the trial court relied on Rule 12(b)(6) as the basis for its dismissal, it was in error.

The Court also found that the district court abused its discretion by dismissing the willfulness claim for failure to prosecute under Rule 41(b). It noted that nothing in Mitutoyo’s litigation conduct showed an intent not to pursue its willful infringement claim. The Court ruled that Mitutoyo’s failure to move for SJ of willful infringement did not warrant dismissal under Rule 41(b) because it did not indicate Mitutoyo’s intent to abandon its willful infringement claim, but rather Mitutoyo’s sense that issues of material fact existed. Accordingly, the Federal Circuit reversed the dismissal, reinstated the willful infringement claim, and remanded for trial on this issue.

Regarding MAC’s standing, Mitutoyo and MAC argued that MAC had standing because it is the exclusive distributor of Mitutoyo products in the United States. This argument, noted the Court, misunderstood the relevant inquiry. The Court observed that “[i]n order for a licensee to have co-plaintiff standing, it must hold at least some of the proprietary rights under the patent.” Id. at 10. The Court determined that because Mitutoyo represented to the district court that another company imported products covered by the ’902 patent and had the right to sell them in the United States, MAC did not possess the requisite exclusive right to sell.

With respect to lost profits, the Federal Circuit held that the district court correctly determined that Mitutoyo failed to meet its burden of establishing any market overlap so as to entitle it to a jury trial on lost profit damages. The Federal Circuit noted that not only was there very little price overlap between Mitutoyo’s products and Central’s products, Mitutoyo failed to put any direct evidence to suggest overlap among the consumers buying the companies’ respective goods. The Court further noted that Central demonstrated that Mitutoyo’s products were sold almost entirely outside the price range in which Central’s customers were likely to buy. Accordingly, the Federal Circuit concluded that there was no basis from which a jury could have found lost profit damages.

As for the royalties, the Federal Circuit held that the district court correctly calculated the royalty rate based on a hypothetical negotiation between a willing patentee and a willing licensee at the time infringement began. The Court reasoned that while the district court could have looked at figures other than Central’s anticipated margin of 70% and Mitutoyo’s profit margin of 29.2% in determining what Central would have been willing to pay and what Mitutoyo would have required for a license, its use of these figures was not clearly erroneous.

Finally, with respect to the royalty base, the Federal Circuit held that the district court committed clear error by including HFTUSA’s sales, rather than Central’s sales to HFTUSA. The Court noted that the district court provided no explanation as to why Central would have agreed to pay a royalty based on those sales. The Court reasoned that the business relationship between HFTUSA and Central, without more, did not provide a sufficient justification for including HFTUSA’s sales in the base. It noted that Central and HFTUSA had no corporate relationship and that there were no courses of dealing or other evidence to suggest that Central would have agreed to pay royalties based on both its sales and HFTUSA’s sales. Accordingly, the Federal Circuit reversed the damages award insofar as it included HFTUSA’s sales in the royalty base and remanded for the proper accounting of the base.